Year-End Tax Planning for 2022
At the end of 2022, the United States is still recovering from the COVID-19 pandemic and tax
professionals are dealing with the multiple changes in the tax rules designed to help the country
cope with the economic impact of the disease. These rules should be considered in year-end
tax planning, along with other changes in the law and existing provisions that impact end-of-year
planning.
As of press time, major tax changes from recent years generally remain in place, including lower
income tax rates, larger standard deductions, limited itemized deductions, elimination of
personal exemptions, a lessened alternative minimum tax (AMT) for individuals, a major
corporate tax rate reduction, limits on interest deductions, and generous expensing and
depreciation rules for businesses. And non-corporate taxpayers with certain income from passthrough entities may still be entitled to a valuable deduction.
Over the summer, President Biden announced a three-part plan to address student loan debt,
including forgiveness of up to $20,000 for some borrowers and extended the repayment freeze
a final time, until the end of this year. Note that through 2025, the cancellation of student loans
is not taxable cancellation of indebtedness income.
There was one major tax bill passed late in 2021: the Infrastructure and Investment Jobs Act
(IIJA). And there has been one major tax bill passed in 2022: the Inflation Reduction Act of
2022.
Key tax provisions of the IIJA include the retroactive termination of the employee retention credit
back to October 1, 2021, and information reporting for digital assets like cryptocurrency. In
addition, the IIJA contains tax provisions covering disaster relief, capital contributions to public
utilities, excise taxes, and pension interest rates.
And although the changes made by the Inflation Reduction Act of 2022 generally aren’t effective
until 2023 (and beyond), the Act did make notable changes to some energy credits and other
items that should be discussed with clients.
To assist you in developing year-end tax planning strategies for your clients, Checkpoint’s tax
experts have analyzed current tax rules to identify the unique opportunities and challenges
facing taxpayers in the current year.
This Special Report discusses the year-end issues faced by individuals, as well as businesses
and business owners and provides sample checklists and client letters.
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Year-End Tax Planning for 2022: Individuals
What’s new for individuals in 2022?
• Many of the tax benefits related to the COVID-19 pandemic have expired or reverted to
their pre-pandemic levels.
• Expanded health insurance subsidies are extended through 2025.
• Both the child tax credit and the child and dependent care credit revert to pre-pandemic
levels.
Pending legislation
As of press time, pending legislation is wending its way through Congress. Three bills now
represent the basis for proposed retirement plan reform commonly known as SECURE Act 2.0.
Provisions prominent in all three bills include: automatic enrollment in or expanded access to
certain retirement plans; another increase to the age at which required minimum distributions
must start; enhancements to the age 50+ catch-up contribution provisions; and creating an
online “lost and found.”
Also, 34 temporary tax provisions expired at the end of 2021 (although many of those provisions
were energy-related and modified and extended in the Inflation Reduction Act of 2022). In
addition, an omnibus spending package expected in December is considered the most likely
vehicle for any tax extender legislation for 2022. Currently, provisions affecting individuals that
are scheduled to expire at the end of 2022 include the temporary allowance of a 100%
deduction for business meals, the mortgage insurance premium deduction, COVID-19 credits
for sick and family leave for the self-employed, and more.
Filing status and dependents
When recommending year-end tax planning strategies, review the taxpayer’s expected filing
status this year and next and the number of dependents the taxpayer expects to claim in each
year.
What’s new?
• The following individual credits have changed: The CTC reverts to $2,000 and the old
phase-out applies.
• The age of a qualifying child decreases to under age 17
• The child and dependent care credit reverts to its pre-pandemic amount.
• The exclusion from income for employer-provided dependent care assistance also
decreases to pre-pandemic levels.
Filing status
A taxpayer’s marital status for the entire year is determined as of December 31. A taxpayer who
is married (or divorced) as of the end of the year is treated as if they were married (or single) all
year long. Taxpayers who are separated or divorcing need to consider tax implications of
property settlements, alimony, child support, retirement plan allocations, and other related
items.
Proper timing when the change in marital status occurs can save taxes. If married filing joint or
married filing separate status will result in more total tax than if each spouse files a separate
return using single (or head of household) filing status, ending the marriage prior to year-end
could result in tax savings. In contrast, if married status results in lower tax liability, delaying the
divorce or legal separation until the beginning of the next year might be advisable.
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Note. This strategy may not apply in a community property state and other liability concerns
related to joint filing may outweigh the potential tax benefit.
If two high-income taxpayers are planning to wed, advise on the effect of a potential marriage
penalty. A “marriage penalty” exists whenever the tax on a couple’s joint return is more than the
combined taxes each spouse would pay if they weren’t married and each filed a single return.
The marriage penalty can apply to joint filers whose income falls into the 35% bracket. However,
even for taxpayers below the 35% bracket, a marriage penalty can nevertheless kick in through
the tax treatment of other items including:
• Student loan interest deduction
• Net investment income tax (NIIT)
• Deductible contributions to traditional IRAs by taxpayers who are active participants in
an employer-sponsored retirement plan
• MAGI limits on Roth IRA contributions (taxpayers who are married filing joint can still
generally contribute, but should consider applicable MAGI limits and the possibility that a
spouse’s higher income could impact each of them and their ability to contribute)
• Child tax credit and additional child tax credit
• State and local tax deduction
• Qualified business income (pass-through) deduction
• Additional 0.9% Medicare tax
• Taxable amount of social security
• Related party and constructive ownership rules
A taxpayer who currently qualifies for head of household tax status may benefit from pulling
more income into this year if changed circumstances (such as getting married) will end their
head of household status next year. Accelerating income may also benefit certain widows or
widowers whose spouses died in 2021 and who are entitled to use joint return rates in 2022, but
not in 2023.
Dependents
Although the deduction for dependency exemptions is $0 for 2018–2025, certain tax deductions
and credits (including the child tax credit for qualifying children under 17) are available with
respect to the taxpayer’s dependent. A dependent is defined as either a qualifying child or a
qualifying relative.
To meet the dependent rules for qualifying child, an individual must be under 19 at the end of
the year, a full-time student who is under 24 (the age test) or permanently disabled. To be a
qualifying relative the person must have less than $4,400 of income and meet other
requirements.
For dependents that need to meet a residence, support, or income test, review whether these
tests are likely to be met before year-end.
Recommendation: In joint custody situations, taxpayers planning to claim
head of household status should maintain records of the amount of time a
child spends in each household.
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Increasing and decreasing AGI
For individuals, year-end tax planning commonly involves methods for increasing and
decreasing AGI. Generally, taxpayers will aim to decrease AGI to reduce their overall tax
liability. But, there are some instances when it will make sense for the taxpayer to increase AGI
in a particular tax year.
What’s new?
The contribution amounts and carryover periods for unused amounts in a health flexible
spending arrangement (health FSA) and dependent care (DC) FSAs have changed as follows:
• For plan years ending in 2022, the contribution limit for health FSAs is $2,850.
• The maximum health FSAs may allow participants to carry over to 2023 is reduced to
$570.
• Carried over funds must be used in the first 2½ months of 2023.
• The contribution limit for dependent care FSAs drops back from $10,500 to $5,000
($2,500 for separate filers).
Who should increase AGI?
A taxpayer who expects to be taxed at a higher rate next year should explore strategies to
increase AGI this year by accelerating the recognition of income. An individual taxpayer might
be in a higher tax bracket next year if:
• The taxpayer is graduating from school or a training program and moving into the paid
workforce.
• Head-of-household or surviving spouse status ends after this year.
• The taxpayer plans to get married next year and will be subject to a marriage penalty.
• The taxpayer expects to be eligible for one or more credits next year (e.g., the child tax
credit) that is subject to phaseout when AGI reaches specified limits and is otherwise not
eligible for the credit this year.
Caution: Any decision to accelerate income from a later year into an earlier
one should consider the time value of money.
Who should decrease AGI?
A taxpayer who expects to be subject to the same or a lower tax rate next year should consider
deferring income recognition. A taxpayer might be in a lower tax bracket next year if:
• The taxpayer becomes eligible for head-of-household status next year.
• The taxpayer expects to have a lower income next year due to retirement, job change, or
other change in circumstance.
• The taxpayer is currently a child who will escape the kiddie tax next year and be in a
lower bracket than their parents.
Numerous tax benefits phase out at specified AGI thresholds. As year-end nears, taxpayers
who otherwise qualify for a tax benefit should consider strategies to reduce AGI this year to
keep their income level below the relevant phaseout threshold. Some tax benefits that are
limited by AGI (or modified AGI) include:
• Nondeductible Roth IRA contributions
• Deductible traditional IRA contributions
• Child tax credits
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Observation: Child tax credits phase out in $50 increments meaning that, for
some taxpayers, a $1 increase in AGI can trigger a $50 reduction in the credit.
• Qualified adoption expenses
• Student loan interest deductions
• Maximum amount of nonpassive income that can be used to offset passive losses from
an active participation rental real estate activity
How to increase or decrease AGI before year-end
Taxpayers may be able to accelerate recognition of income by:
• Accelerating installment sale gain. A taxpayer who has unrealized profit on obligations
arising out of installment sales made in prior years could sell part or all of the obligations
or negotiate with the buyer for accelerated payments.
• Recognizing savings bond interest. A taxpayer can redeem U.S. Saving Bonds, or, for
unmatured Series EE or I bonds, elect to report interest each year as it accrues. That
way, all the income accrued through the end of this year (including interest that accrued
in earlier years) is taxed in 2022.
Caution: This election can’t be reversed without IRS consent. The taxpayer
must, in all future years, pay tax annually on interest as it accrues, and not in
the year the bonds mature or are redeemed.
Taxpayers may be able to reduce or defer recognition of income by:
• Recognizing capital losses. Taxpayers with unrecognized capital losses should consider
recognizing those losses this year to offset capital gains that would otherwise be subject
to the 15% or 20% long-term capital gains tax rate. Capital losses can also offset up to
$3,000 ($1,500 in the case of a married taxpayer filing a separate return) of ordinary
income if capital losses exceed capital gains by at least that amount. Recognizing capital
losses to offset capital gains can also reduce the amount of income subject to the net
investment income surtax.
• Increasing contributions to 401(k) plans, SIMPLE pension plans, Keogh plans. Some
individuals may be able to reduce AGI by increasing contributions to retirement plans
such as 401(k) plans, SIMPLE pension plans, and Keogh plans.
• Making IRA contributions. Taxpayers have until the tax return filing deadline next April to
make IRA contributions for 2022. Unlike Keogh plans, which must be in existence by
year-end, IRAs can be set up when the contribution is made next year. Taxpayers might
want to make IRA contributions earlier rather than later to maximize tax-deferred income
on the contributed amount. Eligible taxpayers can also deduct contributions to traditional
IRAs, subject to limitations.
• Increasing contributions to a health savings account (HSA) or health FSA. Individuals
who are covered by a qualifying high deductible health plan (and are generally not
covered by any other health plan that is not a qualifying high deductible health plan) may
make deductible contributions to an HSA, subject to certain limits. Becoming HSAeligible before year-end can salvage an HSA contribution made earlier in the year.
• Deferring debt cancellation events. If a taxpayer is planning to make a deal with creditors
involving debt reduction, reacquire outstanding obligations for less than face amount, or
planning some other debt reduction transaction that may result in the recognition of
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taxable income, postponing action until January can defer recognition of cancellation of
indebtedness (COD) income.
Caution: When determining whether to defer debt cancellation, consider
whether the taxpayer might be eligible to exclude COD income under an
exception in Code Section 108 for insolvency, bankruptcy, certain student
loans, and other circumstances.
Capital gains and losses
The appropriate year-end planning strategy for capital gains and losses depends on many
factors including an individual’s taxable income, tax rate, amount of adjusted net capital gain,
and whether the individual has unrealized capital losses. For high-income taxpayers, planning
must also take into account the 3.8% net investment income tax (NIIT).
When to recognize gains and losses
As year-end approaches, the taxpayer’s income, gains, and losses for the year become more
certain. This provides strategic planning opportunities. Many of these strategies also apply to
reducing the impact of the NIIT.
Recognizing long-term capital gains may be beneficial if the taxpayer will be subject to a higher
rate in the future. For taxpayers with taxable income below the zero-rate threshold amount,
consider recognizing long-term gains up to the threshold amount.
Avoid recognizing long-term capital losses if taxable income from long-term capital gains and
other sources will be below the zero-rate threshold amount, or if the taxpayer will be subject to a
higher rate next year. However, taxpayers who have no capital gains should consider
recognizing capital losses up to $3,000 ($1,500 in the case of a married taxpayer filing a
separate return), which can be used to offset ordinary income.
Taxpayers holding municipal bonds that have decreased in value may benefit from a bond
swap. This enables a taxpayer to recognize a loss for the decline in a bond’s value while
maintaining the cash flow generated by the bond. A bond swap is especially beneficial if the
taxpayer has short-term capital gains that can be offset by the bond’s capital loss, or the
taxpayer’s overall net capital loss after the bond disposition is $3,000/$1,500 or less (which the
taxpayer can offset with other ordinary income).
Caution: Watch out for the wash sale rules (discussed below) if the
replacement bond is purchased within 30 days of the sale of the old bond and
the bonds are substantially identical.
Taxpayers can use the installment method to defer gain recognition on the sale of eligible
assets. Under an installment sale, gain is recognized in the year payments are received. A likekind exchange can also be used to defer gain on eligible exchange property.
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Taxpayers should consider donating appreciated securities to an exempt organization instead of
selling the securities and donating cash to the organization. That way, the gains will not be
included on the donor’s return.
Selling a principal residence? Strategic timing can yield tax benefits. A taxpayer who sells
property used as a principal residence for at least two of the five years before the sale may
exclude up to $500,000 in gain if married and filing a joint return. Taxpayers with another filing
status (single, head-of-household and married filing separately) may exclude up to $250,000. A
surviving spouse can qualify for the higher $500,000 exclusion if the sale occurs not later than
two years after the decedent spouse’s death, if the requirements for the $500,000 exclusion
were met immediately before death, and the survivor did not remarry before the sale.
Wash sales
The “wash sale” rule prevents a taxpayer from recognizing a loss on disposition of stock or
securities when substantially identical stock or securities are bought and sold within a 61-day
period (30 days before or 30 days after the date of sale). Thus, a taxpayer can’t sell the stock or
securities to establish a tax loss and simply buy it back the next day. The wash sale rule also
applies if the taxpayer acquires an option to buy substantially identical stock or securities or if
the taxpayer acquires substantially identical stock via their IRA. However, it is possible to
partially preserve an investment position while realizing a tax loss by using one of these
techniques:
• Double up. Buy more of the same stock or securities, then sell the original holding at
least 31 days later. The risk here is the possibility of further downward price movement.
• Wait. Sell the original holding and then buy the same stock or securities at least 31 days
later.
• Shift investments. Sell the original holding and buy similar securities in different
companies in the same line of business. In the case of mutual fund shares, sell the
original holding and buy shares in another mutual fund that uses a similar investment
strategy. A similar strategy can be used with Exchange Traded Funds.
Observation: The wash sale rule applies only when stock or securities are sold
at a loss. As a result, a taxpayer can recognize a gain on the sale of stock or
securities in 2022 and then buy the substantially identical stock or securities
back immediately without having to worry about the wash sale rule.
Constructive sales
Under the constructive sale rules, an appreciated financial position in stock is treated as sold,
causing the taxpayer to recognize gain if the shareholder enters into a short sale of the same or
substantially identical property, or enters into an offsetting notional principal contract, a put
option, or similar transaction. The constructive sale causes the shareholder to recognize gain as
if the appreciated shares were sold at fair market value on the date of the short sale or other
similar transaction.
Under an exception to the constructive sale rules, however, gain may still be deferred with a
short sale against the box, or other similar transaction, if (1) the transaction is closed before the
31st day after the close of the tax year; (2) the taxpayer holds the appreciated stock throughout
the 60-day period beginning on the date the transaction is closed; and (3) at no time during that
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60-day period is the taxpayer’s risk of loss on the appreciated stock reduced by an option to
sell, a short sale, or other similar position with respect to substantially identical stock.
Short sellers who want to defer a year-end gain on a short position to the beginning of the
following year should wait until after year-end to begin to cover their short position. Those that
want to take a year-end gain on a short position, for example to be able to use a recognized
loss, can do so as late as the last trading day of the year by purchasing the stock that will be
used to close the short position.
Installment sales
An installment sale can be an effective technique for closing certain transactions this year while
deferring a substantial part of the tax on the sale to later years.
Consider using the installment sale method when selling Code Sec. 1231 property if the
taxpayer has already recognized losses from sales of other Code Sec. 1231 property and would
otherwise recognize a net Code Sec. 1231 loss this year. A net Code Sec. 1231 loss is treated
as an ordinary loss that offsets ordinary income and is not subject to capital loss limits.
Taxpayers have until the due date of their return (including extensions) to decide whether to
elect out of installment reporting.
Caution: While maximizing current Code Sec. 1231 losses may produce a
currently deductible ordinary loss, it also may cause future Code Sec. 1231
gains to be taxed as ordinary income rather than capital gain. Net Code Sec.
1231 gains are treated as ordinary to the extent of net Code Sec. 1231 losses
for the previous five tax years that haven’t been offset by Code Sec. 1231
gains in an intervening tax year.
Many types of transactions are not eligible for the installment sale method including sales at a
loss, sales of stock or securities traded on an established securities market, and gain that’s
recapturable under Code Sec. 1245.
Dealers in property generally are barred from reporting current sales or dispositions under the
installment method. However, dealers may use the installment method on sales of farm
property, and on certain sales of timeshares and residential lots, if the seller elects to pay
interest on the tax deferred by installment reporting.
Passive activity limitations
Losses generated by passive activities may only be used to offset passive activity income.
Passive activity credits may be used only to offset tax on income from passive activities, with a
carryover of any unused credits. In addition, the 3.8% NIIT applies to income from passive
activities, but not from income generated by an activity in which the taxpayer is a material
participant. Taxpayers can employ several year-end strategies for managing passive activity
limitations.
Increase participation in the activity before year-end to satisfy the material participation test. A
taxpayer can satisfy the material participation test by participating in an activity more than 500
hours during the tax year, participating more than 100 hours if no one else does more, or
participating more than 500 hours in all the taxpayer’s “significant participation activities.”
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Illustration: Javier owns interests in a restaurant, a shoe store, and an orange
grove. Each of these ventures has several full-time employees. As of October
31, Javier has worked 200 hours in the restaurant, 200 hours in the shoe
store, and 75 hours in the orange grove. If, by the end of the year, he puts in
another 26 hours in the orange grove, he will have participated more than 500
hours in all his significant participation activities and the material participation
standard will be satisfied.
To facilitate the preceding strategy, consider taking advantage of the one-time opportunity to
regroup activities for the purpose of applying the passive activity rules.
Consider selling the passive activity. If a taxpayer disposes of their entire interest in the activity
in a fully taxable transaction, then any loss from the activity for the tax year of disposition
(including losses carried over from earlier years), over any net income or gain for the tax year
from all other passive activities (including carryover losses from earlier years), is treated as a
nonpassive loss. However, suspended passive activity credits are not freed up when the activity
that generated them is sold, but the taxpayer may elect to increase the property’s basis by the
amount of the unused credits.
Caution: If a passive activity is disposed of by means of an installment sale,
suspended losses will become available for use in offsetting nonpassive
income only as the buyer makes payments and in proportion to the amount of
gain recognized with respect to these payments. To avoid this result, elect out
of the installment method.
Real estate professionals can deduct some rental realty losses. For eligible taxpayers, losses
and credits from rental real estate activities in which the taxpayer materially participates are not
treated as passive and can be used to offset nonpassive activity income.
If possible, becoming more active in rental and business activities (including those conducted
through partnerships and S corporations) will convert these activities from passive to
nonpassive by meeting one of the material participation standards.
Standard and itemized deductions
By acting now, before December 31, taxpayers can maximize opportunities to reduce taxable
income, whether itemizing deductions or claiming the standard deduction.
What’s new?
• Temporary suspension of the AGI percentage limitations for charitable contribution
deductions expired on December 31, 2021.
• The temporary charitable contribution deduction for nonitemizers also expired on
December 31, 2021.
• Deductible out-of-pocket educator classroom expenses now include those for personal
protective equipment, disinfectant, and other supplies used for the prevention of the
spread of COVID-19.
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Non-itemized deduction: charitable contributions
For 2022, there is no non-itemized deduction for charitable contributions. Individuals who want
to deduct charitable contributions must itemize.
Above-the-line deductions: educator expenses
Eligible educators can deduct up to $300 of unreimbursed qualified expenses. Eligible
educators are K-12 teachers, instructors, counselors, principals, or aides who worked at least
900 hours during a school year in a school providing elementary or secondary education. If both
taxpayers on a joint return are eligible educators, each can deduct up to $300 of qualified
expenses, for a maximum deduction of $600.
Eligible purchases include items such as books, supplies (athletic supplies for courses of
instruction in health or physical education), computer equipment (including related software and
services), other equipment and supplementary materials used in the classroom, and personal
protective equipment, disinfectant, and other supplies used for the prevention of the spread of
COVID-19. Supplies purchased to facilitate online instruction are also eligible. Professional
development expenses qualify for the deduction when they’re related to either the curriculum in
which the teacher provides instruction or the students for whom they provide instruction.
Above-the-line deductions: health savings accounts
Individuals or employees who were covered by a high-deductible health plan at any time during
the year and make contributions to an HSA may be eligible for an above-the-line deduction. For
2022, the maximum deduction for an eligible individual with self-only coverage under an HDHP
is $3,650. For an individual with family coverage under an HDHP, the limit is $7,300. Individuals
who are age 55 or older can make catch-up contributions in addition to their regular
contributions for the year. The annual catch-up contribution limit is $1,000.
Becoming eligible in December can salvage a contribution for the entire year. For computing the
annual HSA contribution, taxpayers who are eligible individuals in the last month of the tax year
are “deemed eligible” during every month of that year. Thus, they can make contributions for
months before they enrolled in an HDHP.
Caution: A taxpayer who contributes to an HSA under the “deemed eligible”
rule must remain eligible during the entire testing period (a 12-month period
beginning with the last month of the tax year). Otherwise, any contributions
made during a month when the taxpayer was “deemed eligible” are includible
in gross income and subject to a 10% penalty tax.
Taxpayers may make contributions at any time before the contribution deadline, which is the
due date (without extensions) for filing the individual’s return for the year of the contribution.
Observation: A distribution that is not used to pay qualified medical expenses
is includable in the gross income of the account holder. In addition, such a
distribution generally is subject to an additional 20% tax. However, the 20%
penalty tax does not apply to distributions made on account of death or
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disability or after the account holder reaches age 65. HSA contributions can
also be used to pay for qualified expenses of a spouse or dependent who is
not covered by the HDHP.
Itemized deductions: charitable contributions
Individuals may deduct contributions to charitable organizations up to a certain percent of their
“contribution base” (generally, AGI). For 2022, that percentage is 60% for cash contributions
and 30% for noncash contributions.
For year-end planning, it’s beneficial to review whether an individual has charitable contribution
carryovers from a prior year. If income will decline, care should be taken to use the carryovers
before they expire.
An individual with low basis, highly appreciated stock may want to consider funding a charitable
remainder trust with the stock. The trust can sell the stock without incurring any income tax and
make distributions over time to the current individual beneficiary (or beneficiaries) that will be
taxed at the then-current rates in the years of distribution. The donor can also claim a charitable
deduction in the year the trust is funded, equal to the value of the charitable remainder interest,
subject to limitations.
Itemized deductions: medical expenses
A taxpayer can deduct medical expenses only to the extent the expenses exceed 7.5% of AGI.
When the taxpayer expects to have expenses this year and next, it’s important to determine
whether bunching the expenses into either 2022 or 2023 can help ensure the taxpayer exceeds
the deduction threshold in at least one of the two tax years. Similarly, for a taxpayer who
expects to itemize deductions in either 2022 or 2023, but not both years, bunching expenses
into the itemizing year can achieve tax savings.
Observation: One way to maximize the benefit of deductions is “bunching” –
deferring or accelerating deductions into a single tax year in order to exceed
the standard deduction or other thresholds. Bunching can be especially
beneficial for taxpayers subject to the alternative minimum tax (AMT). A
taxpayer who is subject to the AMT gets no benefit from the standard
deduction.
A taxpayer might accelerate expenses by buying new prescription eye wear now and/or having
orthodontic work done before the end of the year instead of putting it off until January, or paying
any unpaid medical or dental bills before the end of the year. A taxpayer generally can’t deduct
payments made this year for services that will be performed next year or later. However, special
exceptions apply for (1) certain entrance fees to life care facilities allocable to medical care and
paid in connection with obtaining lifetime care, and (2) certain medical insurance premiums paid
by a taxpayer who is under 65 during the tax year for insurance covering medical care for the
taxpayer, spouse, or dependent after the taxpayer reaches 65.
Observation: Careful timing of year-end payments remitted by credit card or
check can yield tax savings. Eligible medical expenses remitted by credit card
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before the end of the year are deductible on this year’s return, even if the
taxpayer isn’t billed for the charge until January. If a taxpayer pays by check
dated and postmarked no later than December 31, it will count as a payment
incurred this year even if the payee doesn’t deposit the check until January 1
or later (assuming that the check is honored when first presented for
payment).
Taxpayers can deduct medical expenses paid for medical dependents, subject to the overall
AGI floor. The test for determining whether an individual qualifies as a dependent for medical
deduction purposes is less stringent than that used to determine whether an individual is a
dependent for other tax purposes.
Recommendation: To ensure that medical expenses paid for dependents will
be allowed, the taxpayer should be prepared to prove the amount of support
provided. Advising clients on best practices for documenting expenses and
support will ensure a smoother tax season and fewer hassles down the road.
The taxpayer can deduct medical expenses paid for a medical dependent even if the dependent
received gross income of $4,400 or more, filed a joint return, or if the taxpayer (or spouse if filing
jointly) could be claimed as a dependent on someone else’s return.
Illustration: Gabi contributed more than half of her mother’s support during the
tax year. She anticipates that her own medical expenses will exceed 7.5% of
her AGI, and that she will be able to itemize her deductions. In December, her
mother incurs substantial medical expenses. If Gabi’s mother will not receive
any tax benefit from these expenses, Gabi should consider paying the medical
bills directly before year end. Gabi can then add these expenses to her own
medical expenses when calculating the deduction on her return.
Itemized deductions: state and local taxes
Taxpayers who itemize their deductions can deduct certain taxes paid to state and local
governments. However, through 2025, the Tax Cuts and Jobs Act limits the state and local tax
(SALT) deduction to $10,000 ($5,000 for marrieds filing separately). The SALT deduction cap
applies to the aggregate deduction for nonbusiness state and local taxes including real and
personal property taxes, income taxes, and (by election) general sales taxes.
Observation: Generally, deductions for state and local business taxes are not
subject to the limit–that is, taxes deducted on an individual’s Schedule C
(Profit or Loss from Business); Schedule E (Supplemental Income and Loss);
or Schedule F (Profit or Loss from Farming) (i.e., paid or accrued in carrying
on a trade or business or in connection with the production of income).
However, property taxes included in a home office deduction are subject to
the SALT cap.
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Taxpayers with fluctuating income should try bunching their SALT payments, itemizing their
deductions in one year and taking the standard deduction in the next. For this strategy to work,
however, the tax must have been assessed before the payment is made (as determined by the
state or local jurisdiction).
Taxpayers can elect to deduct sales and use tax in lieu of income taxes. Accelerating the
purchase of a big-ticket item into this year is a good way to achieve a higher itemized deduction
for sales taxes.
Education
Taxpayers who are paying or saving for their own or their dependents’ education have several
opportunities to maximize education-related tax benefits before year-end.
What’s new?
• For tax years 2021-2025, discharges of many public and private student loans are
excluded from gross income.
AOTC or Lifetime Learning Credit
There are two credits that taxpayers can claim to offset the cost of education: the AOTC and the
Lifetime Learning Credit. Both credits phase out for higher-income taxpayers.
AOTC is a credit for qualified education expenses paid for an eligible student for the first four
years of higher education. The maximum annual AOTC is $2,500 per eligible student and it is
refundable up to $1,000.
The Lifetime Learning Credit is a credit up to $2000 per return for qualified tuition and related
expenses paid for eligible students enrolled in an eligible educational institution. This includes
undergraduate, graduate, and professional degree courses, and courses to acquire or improve
job skills. There is no limit on the number of years a taxpayer can claim this credit.
Taxpayers can claim credits for eligible expenses paid for education that begins this year or
during the first three months of next year. A taxpayer who hasn’t already maximized education
credits for the student this year should consider making the spring tuition payment before yearend.
Caution: If educational expenses paid and deducted in 2021 are refunded in
2022, be mindful of the tax benefit rule–the taxpayer may need to include the
benefit amount in income this year, even if the student is no longer the
taxpayer’s dependent.
Student loan interest deduction
Interest paid on a qualified student loan is deductible up to $2500 per return, except for married
taxpayers filing separate returns, for whom it is denied. This deduction phases out at higher
income levels. Taxpayers who might fall within the phase out range for the student loan interest
deduction this year should try to shift income to next year so that their current-year income falls
below the phase-out threshold.
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Student loan interest deductions might be lower this year for some taxpayers due to COVID-19
relief that reduced the interest on certain student loans to 0% and suspended certain student
loan payments. Taxpayers should consider whether making additional student loan payments
before December 31 will enable them to fully utilize the student loan interest deduction.
The allocation of payments between principal and interest for purposes of the deduction may
not match the allocation stated on Form 1098-E from the lender or loan servicer. A taxpayer
may be able to claim a deduction for payments allocated to principal by the lender to the extent
the payments represent unpaid capitalized interest. For tax purposes, a payment generally
applies first to stated interest that remains unpaid as of the date the payment is due, second to
any loan origination fees allocable to the payment, third to any capitalized interest that remains
unpaid as of the date the payment is due, and fourth to the outstanding principal.
Savings bonds
If certain requirements are met, an individual who redeems Series EE bonds issued after 1989
or Series I bonds may exclude all or part of the interest income on those bonds that would
otherwise be taxable, to the extent used to pay the cost of attending college, vocational school,
or other post-secondary educational institution (for the individual, a spouse, or a dependent).
The exclusion phases out above a specified income threshold.
Caution: The interest exclusion applies only to bonds issued after the
individual has reached age 24. Interest on a bond bought by a parent and
issued in the name of their child under age 24 can’t be excluded by either the
parent or child.
As year-end approaches, consider paying next year’s costs in advance if the costs paid during
the year are less than the savings bond redemption proceeds during the year. For taxpayers
planning to contribute to a 529 plan this year, consider redeeming bonds up to the contemplated
contribution amount.
For clients planning to buy bonds as a year-end gift, consider feasibility of gifting cash to the
parent of the child to enable the parent to buy the bonds in the parent’s name. That way, if the
bonds are redeemed to pay for the child’s education, the exclusion may be available depending
on the parents’ income situation at redemption time.
Coverdell and 529 Plans
A 529 plan, also known as a qualified tuition plan, is a tax-advantaged savings plan designed to
encourage saving for education costs. 529 plans are sponsored by states, state agencies, or
educational institutions and contributions to such plans are considered completed gifts for
federal gift tax purposes.
Observation: Although the Code doesn’t limit annual contributions to 529
plans, each state has aggregate limits per beneficiary.
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529 plans enable participants to prepay tuition costs for a particular beneficiary or contribute to
an education savings account established to pay a beneficiary’s elementary and secondary
tuition and higher education expenses, certain apprenticeship programs, and up to $10,000 of
student loan debt.
Taxpayers may also contribute up to $2,000 annually to a tax-exempt Coverdell Education
Savings Account (Coverdell ESA) for an individual under age 18 (and special needs
beneficiaries of any age). The maximum contribution is reduced ratably for modified AGI
between $190,000 and $220,000 for joint filers, and between $95,000 and $110,000 for others.
Disaster losses
Taxpayers with disaster losses in the current tax year need to determine whether to take them
on this year’s return or elect to deduct them in the immediately preceding year.
What’s new
Federally declared disasters for 2022 include Hurricane Ian, Hurricane Fiona, and several other
storms, floods and wildfires.
Federally declared disasters
For 2018-2025, individuals are not allowed to deduct personal casualty losses unless they are
attributable to a federally declared disaster. A taxpayer may elect to deduct a disaster loss in the
tax year before the year the loss occurred, instead of in the year the loss occurred (the
“preceding year disaster loss deduction”). A disaster loss is a loss that occurs in a disaster area
and is attributable to a federally declared disaster.
Observation: A non-casualty loss may be a disaster loss if incurred in the
course of a trade or business or profit-seeking transaction.
Deducting disaster losses in the prior year
Net disaster losses of individuals are allowed as an addition to the standard deduction, subject
to the $500 per-casualty floor, but exempt from the 10%-of-AGI limitation.
An election to deduct a disaster loss for the year before the year in which the loss occurs is
made on an original return or an amended return for the preceding year. The original return or
amended return must be filed on or before six months after the original due date for the
taxpayer’s return for the disaster year. So, a calendar-year taxpayer who suffers a disaster loss
in 2022 has until October 16, 2023 (because October 15 is a Sunday), to file an original or
amended 2021 return to deduct the loss for 2021.
Earned income tax credit
The earned income tax credit (EITC) is determined based on a taxpayer’s earned income from
wages and other sources.
What’s new?
• For 2022, the maximum earned income credit is $6,935 for those with three or more
qualifying children.
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• The amount of earned income on which the earned income tax credit will be computed is
$7,320 for taxpayers with no qualifying children, $10,980 for taxpayers with one
qualifying child, and $15,410 for taxpayers with two or more qualifying children.
• For 2022, the phaseout of the allowable earned income tax credit will begin at $15,290
for joint filers with no qualifying children ($9,160 for others with no qualifying children),
and at $26,260 for joint filers with one or more qualifying children ($20,130 for others
with one or more qualifying children).
• The amount of disqualified income (generally investment income) a taxpayer may have
before losing the entire earned income tax credit is $10,300 for 2022.
• The under-65 maximum age limit for claiming the credit, for those who don’t have a
qualifying child, is reinstated for 2022.
Maximum EITC amount
An eligible individual is allowed an EITC equal to the credit percentage of earned income (up to
an “earned income amount”) for the tax year, subject to a phaseout. The maximum EITC for
2022 is $560 (for taxpayers with no qualifying children), $3,733 (one qualifying child), $6,164
(two qualifying children), and $6,935 (three or more qualifying children).
Disqualified income
A taxpayer may earn up to $10,300 of disqualified income in 2022 and still qualify for the EITC.
Caution: The $10,300 limit is a cliff, and there is no phase-out range. A
taxpayer who earns $10,301 of disqualified income is denied the EITC
entirely.
Disqualified income is, essentially, investment income along with rents and royalties not derived
from a trade or business, and includes:
• interest or dividends included in gross income;
• tax-exempt interest;
• net income from nonbusiness rents or royalties;
• capital gain net income for the year (but not Code Sec. 1231 gains); and
• net income from passive activities
Taxpayers who believe they could have greater than $10,300 of disqualified income in 2022
should attempt to reduce or postpone receiving payments until 2023.
Illustration: Mary, an individual who would otherwise be eligible for the EITC
owns a building with three apartments. She lives in one unit and rents the
other two out for $900 each per month. She has $11,000 in deductible
expenses associated with the units. If Mary rents out each unit for all 12
months of the year, she will have $10,600 in disqualified income (($900 x 2 x
12) – $11,000) and will not be able to take the EITC.
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If Mary cuts the rent from $900 $885, she will only have $10,240 in
disqualified income (($885 x 2 x 12) – $11,000) and will qualify for the credit.
Alternatively, taxpayers may try to postpone items of disqualified income until 2023. However,
they should be careful that their strategy is not foiled by the constructive receipt doctrine.
Retirement
Proposed retirement plan reform (commonly known as SECURE Act 2.0.) could include:
automatic enrollment in retirement plans; an increase in required minimum distribution age
beginning date (to age 75 according to one Senate plan); enhancements to the age 50+ catchup contribution provisions; creating an online “lost and found” for long-forgotten pension
benefits; and modified rules to allow SIMPLE IRAs to accept Roth contributions.
The required minimum distribution (RMD) rules apply in 2022. Under current law, individuals
who turned 72 in 2022 must take their first distribution by April 1, 2023. Older plan participants
must take their RMDs by the end of 2022. Individuals are not required to take RMDs from Roth
IRAs.
Caution: Those turning 72 this year who wait until next year to take their first
RMD must take a second one by the end of 2023, possibly subjecting them to
a higher tax rate. (Also, see NIIT considerations, below.)
Contributing to tax-advantaged accounts
A special rule allows taxpayers to deduct certain retirement savings contributions made after
year-end. Under this rule, a contribution is treated as made on the last day of the tax year if (a) it
is identified as being made for that year, and (b) it is made by the due date of the taxpayer’s
return, including extensions.
Caution: A qualified retirement plan generally must legally exist by the
taxpayer’s year-end to claim a deduction for the post-year-end contribution.
Post-year-end traditional IRA contributions are deductible in the prior year if the IRA is
established by the tax return due date, without extensions, and the contribution is made by that
date.
Proposed retirement plan changes
Under certain versions of pending legislation that would be effective for tax years beginning
after 2022, employers would be able to treat student loan payments as elective deferrals for
purposes of matching contributions. It could also increase the catch-up limit to $10,000 for
retirement plan participants 60 and over ($5,000 for SIMPLE plans). These limits would be
indexed for inflation. In addition, IRA owners over age 50 would index the $1,000 catch up
contribution currently allowed.
Net investment income tax considerations
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Converting a traditional IRA to a Roth IRA will increase modified AGI, and potentially expose
income (or more income) to the 3.8% NIIT. If possible, time year-end conversions to keep MAGI
below the applicable NIIT threshold. If other net investment income will be lower next year,
consider delaying the conversion.
For NIIT purposes, investment income doesn’t include distributions from tax-favored retirement
plans, such as qualified employer plans and IRAs. However, taxable distributions from these
plans, including RMDs, are included in MAGI, potentially exposing other investment income to
the extra tax. Taxpayers nearing the MAGI threshold, or who already exceed it because of other
income, may have an RMD planning opportunity. The first RMD can be taken without penalty as
late as April 1 of the year following the year the participant reaches age 72 (or, if older, retires).
The additional distribution may cause the taxpayer to be in a higher tax bracket or become
subject to the 3.8% NIIT. However, when making the two RMDs in separate years causes both
years to be adversely affected, rather than just one, consider delaying the first distribution into
the second year if that doesn’t result in it being taxed at a higher rate.
Gift and estate tax
Besides the typical year-end estate planning considerations, substantial proposed estate tax
legislative changes could come into effect in 2023, requiring reevaluation of many estate plans.
What’s new?
The annual gift tax exclusion, now $16,000, will increase to $17,000 in 2023.
Annual gift tax exclusion
For 2022, up to $16,000 of gifts made by a donor to each donee is excluded from the amount of
the donor’s taxable gifts. The exclusion increases to $17,000 in 2023. A gift that qualifies for the
exclusion is not subject to gift tax or Generation-Skipping Transfer Tax.
Unused annual exclusions can’t be carried over and are forever lost. It is best to make
exclusion-eligible gifts as early as possible so as not to lose any of their benefit.
But, a married couple could, for example, gift another married couple up to $64,000 and still
qualify for the exclusion under the split gift rule.
Illustration: Alex and Eliza are married. Alex transfers $32,000 to their adult
child, George. If Eliza agrees to split the gift, the $32,000 will be treated as if
Alex and Eliza each individually gave $16,000 to George. If George is also
married, Alex or Eliza could also transfer $32,000 to George’s spouse and
treat that transfer as a split gift qualifying for the exclusion.
Recommendation: If a gift is made by check near the end of the year and the
donor wants to qualify for this year’s exclusion, the donee should deposit the
check before year-end so there’s no doubt as to when the gift was made.
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Gifting income-producing or appreciated property
The donor and donee can realize overall income tax savings when income-earning property is
given to a donee who is in a lower income tax bracket than the donor or who is not subject to
the NIIT. Estate tax can also potentially be saved because both the value of the gift on the date
of transfer and its post-transfer appreciation (if any) are removed from the donor’s estate.
Income can also be shifted to lower-bracket family members by giving them appreciated
property to be sold by them at a gain. A valid gift of property that is completed before the
property is sold generally shifts the tax liability on the gain from donor to donee, subject to
Kiddie Tax rules.
Tuition and medical expenses
Tuition payments made directly to an educational institution and medical expenses paid directly
to a medical care provider are exempt from gift and Generation-Skipping Transfer (GST) tax.
These payments don’t count toward the annual gift tax exclusion amount or lifetime unified
credit and the donor does not need to file a gift tax return to report the gift.
For this purpose, primary, secondary, preparatory schools, high schools, colleges, and
universities are considered “educational institutions.” The tuition gift tax exclusion applies to
payments for “tuition” only and not for other educational expenses such as books, supplies, and
room and board. A donor might want to consider making tuition payments directly to the
educational institution while using the $16,000 ($17,000 in 2023) annual exclusion to make a
direct gift to the student, or a contribution to a 529 plan, to cover additional expenses such as
books, supplies and room and board.
An alternative for those willing and able to make larger current gifts is to elect to take advantage
of the special rule for “superfunding” a 529 plan (and certain other tuition programs), and make
contributions to a 529 plan that exceed the annual gift tax exclusion into account ratably over a
five-year period starting with the calendar year of the contribution, thus allowing a $80,000 gift
made in 2022 ($85,000 in 2023) to qualify for annual exclusions.
Regarding medical expense gifts, note that the definition of medical care is broad and includes
medical insurance. However, payments to medical providers for cosmetic surgery don’t qualify
for the exemption unless the surgery corrects a birth defect or disfigurement from injury or
disease.
Gifts to minors
The annual exclusion for gifts applies only in the case of “present interests,” which can be tricky
when dealing with gifts to minors. However, a gift to a minor will be considered a present
interest (and qualify for the exclusion) if the gifted property, and all the income generated by the
property, may be spent for the minor’s benefit before reaching age 21 and any amount not spent
by then will go to the minor upon reaching age 21.
Observation: Gifts to minors may be made through custodians designated
under the Uniform Transfers to Minors Act (and predecessor acts) as adopted
by various states. Such gifts generally qualify for the annual exclusion.
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Effect of the kiddie tax
The “kiddie tax” can limit tax savings from intrafamily gifts of income-producing property. Under
the kiddie tax rules, a child pays tax at the trust and estate marginal rate on the child’s unearned
income over the kiddie tax exemption amount ($2,300 for 2022; $2,500 for 2023) if that tax is
higher than the tax the child would otherwise pay on the income. Alternatively, the parent can
elect in some cases to include the child’s income on the parent’s return.
Children 18 and older can increase their earned income to exceed more than half of their
support and thus avoid the kiddie tax on their unearned income. This does not apply for children
under age 18. Also note that in all cases, the child’s earned income can be sheltered by the
child’s standard deduction and other deductions, and earned income in excess of those
deductions will be taxed at the child’s tax rate.
Election by complex trusts and estates
Complex trust and estate distributions made within the first 65 days of the year may electively
be treated as paid and deductible in the prior year. Thus, fiduciaries can wait until next year to
decide whether the payments may be more profitably imputed back to 2022 via the 65-day rule
or treated as 2023 payments. If an entity elects to treat a 2023 distribution as paid in 2022, the
distribution is taxable to the beneficiary in 2022. The election doesn’t have to be made for the
entire amount distributed; it can apply to only part of the amounts distributed to a beneficiary.
Proposed estate tax changes
Pending legislation could make some significant changes to estate and gift taxes effective after
year-end.
One proposed change would make the transfer by gift or bequest of appreciated assets with
unrealized gains a “realization event” for tax purposes and tax the transfer as if the underlying
property was sold. In addition, such property transferred by gift or held at death would be
subject to a $5 million lifetime exclusion for a single filer. Unrealized capital gains in appreciated
assets would also be taxed if they were transferred into or distributed in kind from an irrevocable
trust, partnership or other noncorporate entity if the transfer was effectively a gift to the recipient.
There are also proposed changes to the rules for donor advised funds (DAFs), grantor retained
annuity trusts (GRATS), the way promissory notes are valued when selling appreciated property
to a grantor trust and limits to the generation-skipping transfer (GST) exemption that would limit
the GST exemption to direct skips no more than two generations from the grantor.
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Year-End Tax Planning for 2022: Businesses
What’s new for businesses in 2022?
Congress passed the Inflation Reduction Act of 2022 which extends, through 2024, the credit for
electricity produced from certain renewable resources; the energy credit; and other energyrelated credits (with various extension dates)
The Act also introduces two new corporate taxes and various new clean energy related tax
credits. But these will not go into effect until 2023. The two corporate taxes are: (a) the 15%
corporate alternative minimum tax on the adjusted financial statement income of applicable
corporations (sometimes referred to as the “Book Minimum Tax”) and (b) the 1% excise tax on
the repurchase of corporate stock.
Cash vs. accrual method
Any entity, other than a tax shelter, that meets an inflation-adjusted average annual gross
receipts test ($27 million for tax years beginning in 2022; estimated $29 million for 2023) can
use the cash method of accounting. A C corporation that is a qualified personal service
corporation (PSC) is also allowed to use the cash method, regardless of average annual gross
receipts, provided it does not maintain inventories for tax purposes. Use of the cash method
provides year-end planning opportunities for shifting income and deductions with an eye to tax
savings. Taxes can easily be deferred by (a) postponing billings until next year, and (b)
accelerating deductible expenditures into this year subject, however, to the passive activity
limitations and the at-risk rules.
Although income-deferral and deduction-acceleration are standard year-end tax planning
strategies, this year may favor doing the opposite if Congress were to consider raising the top
individual, capital gain, and corporate tax rates. If changes like those were enacted, accelerating
income into this year might subject it to a lower tax rate, and deferring deductions into next year
could allow them to be taken against higher taxed income.
For cash method taxpayers, business expenses are generally deductible when paid. To
increase recognition of expenses for the current year, these taxpayers should consider paying
invoices received before year-end, and even prepaying some expenses where feasible.
However, a business that could be subject to increased rates next year might want to defer
expense payments until then, where feasible from a business standpoint. Note, however, that
some prepayments made by cash method taxpayers, such as prepaid compensation, must be
prorated over the period to which they apply.
Acceleration of expenses is more difficult for accrual method taxpayers. For them, expenses
generally aren’t deductible until property is delivered or services are performed. This may be
advantageous, however, if tax rates are higher next year, in which case businesses may want to
delay some deliveries, or performance of some services. However, prepaid expenses may be
deductible in the current year under certain circumstances. For example, when the taxpayer
reasonably expects the property or services to be provided or performed within 3.5 months after
making the payment, or when the recurring item exception applies, generally when economic
performance occurs within 8.5 months after the close of a tax year. The recurring item exception
must be consistently applied for a type of item or all items from one year to the next, so it is
unlikely that IRS would approve a switch from that method to generate a short-term tax
advantage, and, in any event, businesses may not want to forego its advantages permanently.
For ratable service contracts, taxpayers can treat economic performance as occurring on a
ratable basis over the term of the service contract when certain conditions are met.
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The timing of year-end bonus payments is an area where both cash- and accrual-basis
employers have some opportunity to time deductions. Cash-basis employers deduct bonuses in
the year they are paid, so they can time the payment for maximum tax effect. Accrual-basis
employers, on the other hand, deduct a bonus in the accrual year, when all events related to it
are established with reasonable certainty. However, the bonus must be paid within 2.5 months
after the end of the accrual employer’s tax year for the deduction to be allowed in the earlier
year. Accrual employers looking to defer deductions to a higher-taxed future year should
consider changing their bonus plans before year-end to set the payment date later than the 2.5-
month window or change the bonus plan’s terms to make the bonus amount not determinable at
year end.
Depreciation and expensing
Acquiring qualifying property and placing it into service before year-end can result in a full
expensing or bonus depreciation deduction for 2022. However, there are many considerations
when planning year-end purchases. An important one is the possibility of increased tax rates
next year, which may make deferring deductions more beneficial.
Bonus depreciation
Through 2022, a 100% first-year deduction for the adjusted basis of depreciable property is
allowed for qualified property acquired and placed in service during the year. Qualifying property
includes tangible property depreciated under MACRS with a recovery period of 20 years or less,
most computer software, qualified film, television, and live theatrical productions, and water
utility property. Possible higher tax rates next year might make some businesses want to defer
placing bonus-depreciation-eligible property into service until next year, or to opt out of bonus
depreciation on their tax return for this year.
What’s New?
For 2022, the maximum amount of section 179 property that can be expensed is $1,080,000.
That full amount is available until qualifying property placed in service during the year reaches
$2,700,000, at which point a phase out begins.
The 100% bonus depreciation stays in effect until January 1, 2023. At that point, the first-year
bonus depreciation deduction decreases as follows:
• 80% for property placed in service during 2023
• 60% for property placed in service during 2024
• 40% for property placed in service during 2025
• 20% for property placed in service during 2026
Section 179 expensing
Taxpayers (other than estates, trusts, and certain noncorporate lessors) can also elect to deduct
expenses for the cost of eligible property placed in service in the taxpayer’s trade or business
during the tax year, subject to limitations.
Property eligible for expensing includes:
• Tangible Code Sec. 1245 property (generally, machinery and equipment), depreciated
under the MACRS rules, regardless of its depreciation recovery period;
• Off-the-shelf computer software;
• Qualified improvements to building interiors;
• Roofs, HVAC systems, fire protection systems, alarm systems, and security systems.
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The eligible property can be new or used.
For 2022, the maximum amount of section 179 property that can be fully expensed is
$1,080,000. That limit phases out dollar-for-dollar once the amount of section 179 property
placed in service during the tax year exceeds $2,700,000 (complete phase-out at $3,780,000 of
expense-eligible property placed in service).
Businesses have much flexibility in choosing whether to elect expensing in response to possible
late year legislation. The election can be made or revoked as late as the due date for filing an
amended return for the election year.
Business interest deductions
The Internal Revenue Code limits the deduction of business interest expenses. The deduction
limit on business interest doesn’t apply to businesses with 3-year average gross receipts of $27
million or less for 2022 ($29 million or less for 2023). The limitation also does not apply to
deductions for interest paid by vehicle dealers on carried inventory. In addition, some real estate
related businesses can opt out of the limitation, if they forego accelerated depreciation. Interest
that can’t be deducted due to the limitation is carried forward indefinitely.
What’s new?
• Two changes made by the Tax Cuts and Jobs Act became effective on January 1, 2022.
First, businesses are required to amortize research and development expenses over a
five-year period. Second, the limitation on business net interest deduction is reduced to
30% of earnings before interest and taxes (EBIT) instead of earnings before interest,
taxes, depreciation, and amortization (EBITDA).
Qualified business income deduction
Through the end of 2025, eligible taxpayers can deduct up to 20% of qualified business income
(QBI) from a domestic sole proprietorship, partnership, S corporation, trust, or estate, and up to
20% of the combined qualified real estate investment trust (REIT) dividends and publicly traded
partnership income (PTP) of the taxpayer. The combined deduction cannot exceed 20% of the
excess of the taxpayer’s taxable income over net capital gain for the year. Trades or businesses
involving the performance of services in fields of health, law, accounting, actuarial science,
performing arts, consulting, athletics, financial services, brokerage services, or any trade or
business whose principal asset is the reputation or skill of one or more of its employees or
owners do not qualify for the QBI deduction unless the individual taxpayer’s income is below a
phase-out threshold.
For 2022, specified service businesses qualify for the QBI deduction if their taxable income is
less than $340,100 for married filing joint returns, $170,050 for married filing separate returns,
or $170,050 for single and head of household returns. The deduction phases out ratably over
the next $50,000 of taxable income over the thresholds ($100,000 phaseout for joint return
filers).
Year-end strategies
Taxpayers with income near the threshold for this year may benefit from accelerating
deductions or deferring income, to the extent possible, so their taxable income falls below the
threshold. Similarly, if the taxpayer is well below the threshold this year but expects to exceed it
next year, consider options to pull more income into 2022. This could have the added benefit of
lower tax on the accelerated income in the event of higher tax rates next year.
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Net operating losses
Changes to the NOL deduction in 2021 as well as other recent-year changes impact year-end
planning opportunities and strategies.
Some recent changes to the NOL deduction and carryback rules are worth noting:
• 2018, 2019, and 2020 NOLs may be carried back five years and carried forward
indefinitely; and
• Post-2020 NOLs may not be carried back (except for farm losses, which may be carried
back two years), but may be carried forward indefinitely.
• Starting with the 2021 tax year, the NOL deduction is subject to an 80% of taxable
income limitation (not counting the NOL or the qualified business income deduction)
NOLs from before 2018 could be carried back two years and carried forward only 20 years.
What this boils down to is that for earlier tax years, NOL carryovers and carrybacks could fully
offset taxable income, but unused losses couldn’t be carried forward indefinitely. Starting with
the 2021 tax year, deductions for NOLs generated after 2017 are limited by the 80% standard,
but unused losses may be carried forward indefinitely.
NOL carryforwards of noncorporate taxpayers are increased by their nondeductible “excess
business losses,” which are, with many modifications, the excess of the taxpayer’s aggregate
trade or business deductions for the tax year over its aggregate gross business income or gain
plus $250,000 ($500,000 for joint return filers), as adjusted for inflation.
Making the most of NOLs
A taxpayer that may have difficulty taking advantage of the full amount of an NOL carryforward
this year should consider shifting income into and deductions away from this year. By doing so,
the taxpayer can avoid the intervening year modifications that would apply if the NOL is not fully
absorbed in 2022. This may also avoid potentially higher tax rates next year on the accelerated
income and increase the tax value of deferred deductions.
When to avoid an NOL
A corporation (other than a large corporation) that anticipates a small NOL this year and
substantial net income next year may find it worthwhile to accelerate just enough of its 2023
income (or to defer just enough of its 2022 deductions) to create a small amount of net income
for this year. This will permit the corporation to base its estimated tax installments next year on
the lower amount of income shown on its 2022 return, rather than having to pay estimated taxes
based on 100% of its much higher 2023 taxable income.
Partnership and S corporation losses
Losses and shareholder or partnership basis
A shareholder can deduct its pro rata share of S corporation losses only to the extent of the total
of its basis in the S corporation stock and debt. This determination is made as of the end of the
S corporation tax year in which the loss occurs. Any loss or deduction that can’t be used on
account of this limitation can be carried forward indefinitely. If a shareholder wants to claim a
2022 S corporation loss on its own 2022 return, but the loss exceeds the basis for its S
corporation stock and debt, it can still claim the loss in full by lending the S corporation more
money or by making a capital contribution by the end of the S corporation’s tax year (in the case
of a calendar year corporation, by December 31).
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Similarly, a partner’s share of partnership losses is deductible only to the extent of their
partnership basis as of the end of the partnership year in which the loss occurs. Basis can be
increased by a capital contribution, or in some cases by the partnership itself borrowing money
or by the partner taking on a larger share of the partnership’s liabilities before the end of the
partnership’s tax year.
Passive activity limitations
The impact of the passive activity loss limitation rules must also be considered. Limited partners
always have passive activity interests except to the extent IRS regs say otherwise. If an
individual who is a limited partner meets the material participation test under the 500-hours-ofparticipation rule, the five-of-ten-years-of-material-participation rule, or the any-three-prior-yearmaterial-participation rule for a personal service activity, the partner is treated as materially
participating in any activity of the limited partnership. This will affect the application of the
passive activity rules to their share of any income, gain, loss, deduction, or credit attributable to
the limited partnership interest and to any gain or loss from the activity recognized on the sale or
exchange of the interest.
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Year-end Tax Planning for 2022: Practice Aids
Extenders and expiring provisions 2022
Provisions that expired at the end of 2021 (and have not been extended into 2022 as of time of
publication):
• Mortgage insurance premium deduction
• Health coverage tax credit
• CARES Act charitable deduction for nonitemizers (with modifications)
• The increased income limit for charitable deductions for itemizers
• Computation of adjusted taxable income without regard to any deduction allowable for
depreciation, amortization, or depletion (business interest deduction limitations)
• Three-year depreciation for racehorses two years or younger
• Accelerated depreciation for business property on an Indian reservation
• American Samoa Economic Development Credit
• Indian Employment Tax Credit
• Mine Rescue Team Training Credit
• 12.5% increase in annual LIHTC authority
• Payroll tax credits for COVID-19 sick and family leave
• Employee Retention Credit
• Prevention of partial plan termination
Provisions extended through December 31, 2024, via the Inflation Reduction Act of 2022:
• Credit for electricity produced from certain renewable resources
• Energy credit
• Other energy-related credits (with various extension dates)
Provisions recently extended through December 31, 2025:
• CARES Act exclusion for employer payments of student loans
• Exclusion for canceled mortgage debt
• New Markets Tax Credit
• Work Opportunity Credit
• Empowerment Zone Tax Incentives
• Employer Credit for paid family and medical leave
Provisions recently made permanent:
• 7.5% floor for the medical expense deduction
• Exclusion of benefits for volunteer firefighters and emergency medical responders
• Business tax extender provisions
• Credit for certain expenditures for maintaining railroad tracks
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Year-End Tax Planning Checklist for Individuals
• Determine whether the client’s marital status has changed during the year. Has there
been a change in the number of their dependents?
• High-income taxpayers must be careful of the 3.8% net investment income (NII) tax.
Taxpayers who may be subject to this tax should consider ways to minimize NII for the
remainder of the year by, for example, not selling stock or other investment property.
• Analyze capital gains. Should the client consider selling capital loss assets to shelter
capital gains? Also, remember individuals may deduct $3,000 a year in capital losses
against ordinary income.
• Clients should postpone income until next year and accelerate deductions into this year
if doing so will enable the client to claim larger claim larger deductions, credits, and other
tax breaks for this year that are phased out over varying levels of AGI. Postponing
income to next year also is desirable for taxpayers who anticipate being in a lower tax
bracket next year due to changed financial circumstances.
• In some cases, it may pay to accelerate income into 2022. For example, when a person
expects to be in a higher tax bracket next year or who will have a more favorable filing
status this year than next (e.g., head of household versus single filing status). This will
also apply to individuals who will be subject to a higher tax rate next year under pending
tax legislation.
• Clients interested in converting a traditional IRA to a Roth IRA should consider
converting traditional-IRA money invested in any beaten-down stocks (or mutual funds)
into a Roth IRA in the current year if eligible to do so. Keep in mind, however, that such
a conversion will increase AGI for the current year, and possibly reduce tax breaks
geared to AGI.
• Consider whether a client should defer a year-end bonus from an employer until next
year. Be careful of the doctrine of constructive receipt.
• Determine whether the client should take the standard deduction or itemize. It may be
advantageous to push itemized deductions into next year and take the standard
deduction this year. Be careful, though, many itemized deductions are disallowed:
o Miscellaneous itemized deductions are disallowed.
o Taxpayers can only deduct medical expenses to the extent they exceed 7.5% of
AGI.
o No more than $10,000 of state and local taxes may be deducted.
o Personal casualty and theft losses are deductible only if they’re attributable to a
federally declared disaster and only to the extent the $100-per-casualty and
10%-of-AGI limits are met.
• Two temporary, COVID-related changes (that have now expired) to watch out for this
year:
o Individuals may no longer claim a $300 ($600 on a joint return) adjustment for
cash charitable contributions.
o The percentage limit on charitable contributions is reduced to 60% of modified
AGI (MAGI).
• Consider whether to employ a bunching strategy to pull or push discretionary medical
expenses and charitable contributions (and SALT payments, if the limits are repealed)
into the year where they will do some tax good. Individuals could consider using a credit
card to pay deductible expenses before the end of the year. Under the cash method of
accounting, these expenses are deductible in the current year, even if the credit card bill
is paid after the end of the year.
• If the client has education expenses, did they take full advantage of the AOTC and
Lifetime Learning Credit? If not, consider trying to accelerate expenses into this year.
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• The age at which taxpayers must begin taking RMDs from a 401(k) plan or IRA has
increased to 72. The requirement to take RMDs is back, as it was only suspended for
2020 and not 2021 and subsequent years.
• Taxpayers who are 70½ or older by the end of the year should consider whether to
make a charitable contribution (qualified charitable distribution, or QCD) from their
traditional IRA. QCDs are excluded from the taxpayer’s income but are not deductible.
However, the taxpayer may still claim the entire standard deduction.
• Review with clients the amount set aside for next year in their employer’s health FSA
and HSAs to ensure they’re able to fully utilize these amounts in 2022. Roll them over to
the next year to the extent necessary and possible.
• Make sure clients are taking full advantage of their annual gift tax exclusion ($16,000 for
2022), if they sometimes run up against (or exceed) this exclusion amount. Remember
this amount is per person, for both donors and donees. For example, a married couple
could give a married child and their spouse up to $64,000 (4 x $16,000) without incurring
gift tax.
• Consider whether to claim uninsured, unreimbursed casualty or theft losses related to a
federally declared disaster on this year’s return or on last year’s return. The client should
settle insurance or damage claims related to this disaster by year’s end to claim the
deduction.
• For low-income clients, analyze the changes to the EITC to determine how the amounts
of and eligibility for the credit have changed.
• Review whether the client has any kiddie tax issues.
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Year-End Tax Planning Checklist for Businesses
• Determine if a corporate client will be subject to the corporate alternative minimum tax in
2023 and plan accordingly if this looks likely.
• For clients other than C corporations, review issues related to the Qualified Business
Income deduction, with particular attention to where the client stands on the dollar
thresholds and amount of W-2 wages.
• If the client has placed less than $1,080,000 of section 179 property in service during the
year, consider whether to place more of such property in service to take full advantage
of the limits.
• Consider whether the client can take advantage of the 100% bonus depreciation
deduction. This write-off is available without proration, even if qualifying assets are in
service for only a few days in the current year.
• Consider purchasing items that qualify for the de minimis safe harbor (“book-tax
conformity”) election under the repair regs.
• Consider whether a corporate client that anticipates a small net operating loss (NOL) for
the current year and substantial net income next year may find it worthwhile to
accelerate just enough of next year’s income (or to defer just enough of its current
deductions) to create a small amount of net income for the current year. This will permit
the corporation to base its estimated tax installments for next year on the relatively small
amount of income shown on its current return, rather than having to pay estimated taxes
based on 100% of its much larger next-year taxable income.
• Consider whether the client can postpone cancellation of debt income by deferring a
debt-cancellation event until next year.
• If the client has a passive activity with suspended losses, consider disposing of the
activity before the end of the year to take the losses.
• Review business interest paid or incurred by the client to see if limitations apply.
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Sample Year-End Planning Client Letter: Individuals
Dear Client:
With year-end approaching, it is time to start thinking about moves that may help lower your tax
bill for this year and next. This year’s planning is more challenging than usual due to recent
changes made by the Inflation Reduction Act of 2022 and the potential change in congressional
balance of power resulting from the midterm elections.
Whether or not tax increases become effective next year, the standard year-end approach of
deferring income and accelerating deductions to minimize taxes will continue to produce the
best results for all but the highest income taxpayers, as will the bunching of deductible
expenses into this year or next to avoid restrictions and maximize deductions.
If proposed tax increases do pass, however, the highest income taxpayers may find that the
opposite strategies produce better results: Pulling income into 2022 to be taxed at currently
lower rates, and deferring deductible expenses until 2023, when they can be taken to offset
what would be higher-taxed income. This will require careful evaluation of all relevant factors.
We have compiled a list of actions based on current tax rules that may help you save tax dollars
if you act before year-end. Not all of them will apply to you, but you (or a family member) may
benefit from many of them. We can narrow down specific actions when we meet to tailor a
particular plan for you. In the meantime, please review the following list and contact us at your
earliest convenience so that we can advise you on which tax-saving moves might be beneficial:
• Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The
surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a
threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual
filing a separate return, and $200,000 in any other case).
• As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on
the taxpayer’s estimated MAGI and NII for the year. Some taxpayers should consider ways to
minimize (e.g., through deferral) additional NII for the balance of the year, others should try to
reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII
and other types of MAGI. An important exception is that NII does not include distributions from
IRAs or most other retirement plans.
• The 0.9% additional Medicare tax also may require higher-income earners to take year-end
action. It applies to individuals whose employment wages and self-employment income total more
than an amount equal to the NIIT thresholds, above. Employers must withhold the additional
Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Selfemployed persons must take it into account in figuring estimated tax. There could be situations
where an employee may need to have more withheld toward the end of the year to cover the tax.
This would be the case, for example, if an employee earns less than $200,000 from multiple
employers but more than that amount in total. Such an employee would owe the additional
Medicare tax, but nothing would have been withheld by any employer.
• Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%,
depending on the taxpayer’s taxable income. If you hold long-term appreciated-in-value assets,
consider selling enough of them to generate long-term capital gains that can be sheltered by the
0% rate. The 0% rate generally applies to net long-term capital gain to the extent that, when
added to regular taxable income, it is not more than the maximum zero rate amount (e.g.,
$83,350 for a married couple; estimated to be $89,250 in 2022). If, say, $5,000 of long-term
capital gains you took earlier this year qualifies for the zero rate then try not to sell assets yielding
a capital loss before year-end, because the first $5,000 of those losses will offset $5,000 of
capital gain that is already tax-free.
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• Postpone income until 2023and accelerate deductions into 2022 if doing so will enable you to
claim larger deductions, credits, and other tax breaks for 2021 that are phased out over varying
levels of AGI. These include deductible IRA contributions, child tax credits, higher education tax
credits, and deductions for student loan interest. Postponing income also is desirable for
taxpayers who anticipate being in a lower tax bracket next year due to changed financial
circumstances. Note, however, that in some cases, it may actually pay to accelerate income into
2022. For example, that may be the case for a person who will have a more favorable filing status
this year than next (e.g., head of household versus individual filing status), or who expects to be
in a higher tax bracket next year. That’s especially a consideration for high-income taxpayers who
may be subject to higher rates next year under proposed legislation.
• If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditionalIRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2022 if
eligible to do so. Keep in mind that the conversion will increase your income for 2022, possibly
reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for
those potentially subject to higher tax rates under pending legislation.
• It may be advantageous to try to arrange with your employer to defer, until early 2023, a bonus
that may be coming your way. This might cut as well as defer your tax. Again, considerations may
be different for the highest income individuals.
• Many taxpayers won’t want to itemize because of the high basic standard deduction amounts that
apply for 2022 ($27,700 for joint filers, $13,850 for singles and for marrieds filing separately,
$20,800 for heads of household), and because many itemized deductions have been reduced or
abolished, including the $10,000 limit on state and local taxes; miscellaneous itemized
deductions; and non-disaster related personal casualty losses. You can still itemize medical
expenses that exceed 7.5% of your AGI, state and local taxes up to $10,000, your charitable
contributions, plus mortgage interest deductions on a restricted amount of debt, but these
deductions won’t save taxes unless they total more than your standard deduction.
• Some taxpayers may be able to work around these deduction restrictions by applying a bunching
strategy to pull or push discretionary medical expenses and charitable contributions into the year
where they will do some tax good. For example, a taxpayer who will be able to itemize deductions
this year but not next will benefit by making two years’ worth of charitable contributions this year.
The COVID-related increase for 2022 in the income-based charitable deduction limit for cash
contributions from 60% to 100% of MAGI assists in this bunching strategy.
• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will
increase your 2022 deductions even if you don’t pay your credit card bill until after the end of the
year.
• If you expect to owe state and local income taxes when you file your return next year and you will
be itemizing in 2022, consider asking your employer to increase withholding of state and local
taxes (or make estimated tax payments of state and local taxes) before year-end to pull the
deduction of those taxes into 2022. But this strategy is not good to the extent it causes your 2022
state and local tax payments to exceed $10,000.
• Required minimum distributions RMDs from an IRA or 401(k) plan (or other employer-sponsored
retirement plan) have not been waived for 2022. If you were 72 or older in 2022 you must take an
RMD. Those who turn 72 this year have until April 1 of 2023 to take their first RMD but may want
to take it by the end of 2022 to avoid having to double up on RMDs next year.
• If you are age 70½ or older by the end of 2022, and especially if you are unable to itemize your
deductions, consider making 2022 charitable donations via qualified charitable distributions from
your traditional IRAs. These distributions are made directly to charities from your IRAs, and the
amount of the contribution is neither included in your gross income nor deductible on Schedule A,
Form 1040. However, you are still entitled to claim the entire standard deduction. (The qualified
charitable distribution amount is reduced by any deductible contributions to an IRA made for any
year in which you were age 70½ or older, unless it reduced a previous qualified charitable
distribution exclusion.)
• Take an eligible rollover distribution from a qualified retirement plan before the end of 2022 if you
are facing a penalty for underpayment of estimated tax and increasing your wage withholding
won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be
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applied toward the taxes owed for 2022. You can then timely roll over the gross amount of the
distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA.
No part of the distribution will be includible in income for 2022, but the withheld tax will be applied
pro rata over the full 2022 tax year to reduce previous underpayments of estimated tax.
• Consider increasing the amount you set aside for next year in your employer’s FSA if you set
aside too little for this year and anticipate similar medical costs next year.
• If you become eligible in December of 2022 to make HSA contributions, you can make a full
year’s worth of deductible HSA contributions for 2022.
• Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may
save gift and estate taxes. The exclusion applies to gifts of up to $16,000 made in 2022 to each
of an unlimited number of individuals. You can’t carry over unused exclusions to another year.
These transfers may save family income taxes where income-earning property is given to family
members in lower income tax brackets who are not subject to the kiddie tax.
• If you were in federally declared disaster area, and you suffered uninsured or unreimbursed
disaster-related losses, keep in mind you can choose to claim them either on the return for the
year the loss occurred (in this instance, the 2022 return normally filed next year), or on the return
for the prior year (2021), generating a quicker refund.
• If you were in a federally declared disaster area, you may want to settle an insurance or damage
claim in 2022 to maximize your casualty loss deduction this year.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting
us, we can tailor a particular plan that will work best for you.
Very truly yours,
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Sample Year-End Planning Client Letter: Businesses
Dear Business Client:
With year-end approaching, it is time to start thinking about moves that may help lower your
business’s taxes for this year and next. This year’s planning is more challenging than usual due
to recent changes made by the Inflation Reduction Act of 2022 and the potential change in
congressional balance of power resulting from the midterm elections.
Whether or not tax increases become effective next year, the standard year-end approach of
deferring income and accelerating deductions to minimize taxes will continue to produce the
best results for most small businesses, as will the bunching of deductible expenses into this
year or next to maximize their tax value.
If proposed tax increases do pass, however, the highest income businesses and owners may
find that the opposite strategies produce better results: Pulling income into 2022 to be taxed at
currently lower rates, and deferring deductible expenses until 2023, when they can be taken to
offset what would be higher-taxed income. This will require careful evaluation of all relevant
factors.
We have compiled a list of actions based on current tax rules that may help you save tax dollars
if you act before year-end. Not all of them will apply to you or your business, but you may
benefit from many of them. We can narrow down specific actions when we meet to tailor a
particular plan for your business, In the meantime, please review the following list and contact
us at your earliest convenience so that we can advise you on which tax-saving moves might be
beneficial:
• Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified
business income. For 2022, if taxable income exceeds $340,100 for a married couple filing jointly,
(about half that for others), the deduction may be limited based on whether the taxpayer is
engaged in a service-type trade or business (such as law, accounting, health, or consulting), the
amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property
(such as machinery and equipment) held by the business. The limitations are phased in; for
example, the phase-in applies to joint filers with taxable income up to $100,000 above the
threshold, and to other filers with taxable income up to $50,000 above their threshold.
• Taxpayers may be able to salvage some or all of this deduction, by deferring income or
accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller
deduction phaseout) for 2022. Depending on their business model, taxpayers also may be able
increase the deduction by increasing W-2 wages before year-end. The rules are quite complex,
so don’t make a move in this area without consulting us.
• More small businesses are able to use the cash (as opposed to accrual) method of accounting
than were allowed to do so in earlier years. To qualify as a small business a taxpayer must,
among other things, satisfy a gross receipts test, which is satisfied for 2022 if, during a three-year
testing period, average annual gross receipts don’t exceed $27 million (next year this dollar
amount is estimated to increase to $29 million). Not that many years ago it was $1 million. Cash
method taxpayers may find it a lot easier to shift income, for example by holding off billings till
next year or by accelerating expenses, for example, paying bills early or by making certain
prepayments.
• Businesses should consider making expenditures that qualify for the liberalized business property
expensing option. For tax years beginning in 2022, the expensing limit is $1,080,000, and the
investment ceiling limit is $2,700,000. Expensing is generally available for most depreciable
property (other than buildings) and off-the-shelf computer software. It is also available for interior
improvements to a building (but not for its enlargement), elevators or escalators, or the internal
structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.
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• The generous dollar ceilings mean that many small and medium sized businesses that make
timely purchases will be able to currently deduct most if not all their outlays for machinery and
equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in
service during the year. So expensing eligible items acquired and placed in service in the last
days of 2022, rather than at the beginning of 2023, can result in a full expensing deduction for
2022.
• Businesses also can claim a 100% bonus first year depreciation deduction for machinery and
equipment bought used (with some exceptions) or new if purchased and placed in service this
year, and for qualified improvement property, described above as related to the expensing
deduction. The 100% write-off is permitted without any proration based on the length of time that
an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is
available even if qualifying assets are in service for only a few days in 2022.
• Businesses may be able to take advantage of the de minimis safe harbor election (also known as
the book-tax conformity election) to expense the costs of lower-cost assets and materials and
supplies, assuming the costs aren’t required to be capitalized under the UNICAP rules. To qualify
for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an
applicable financial statement (AFS, e.g., a certified audited financial statement along with an
independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500.
Where the UNICAP rules aren’t an issue, and where potentially increasing tax rates for 2023
aren’t a concern, consider purchasing qualifying items before the end of 2022.
• A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for
2022 (and substantial net income in 2023) may find it worthwhile to accelerate just enough of its
2023 income (or to defer just enough of its 2022 deductions) to create a small amount of net
income for 2022. This allows the corporation to base its 2023 estimated tax installments on the
relatively small amount of income shown on its 2022 return, rather than having to pay estimated
taxes based on 100% of its much larger 2023 taxable income.
• Year-end bonuses can be timed for maximum tax effect by both cash-and accrual-basis employers.
Cash-basis employers deduct bonuses in the year paid, so they can time the payment for maximum
tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to
them are established with reasonable certainty. However, the bonus must be paid within 2½ months
after the end of the employer’s tax year for the deduction to be allowed in the earlier accrual year.
Accrual employers looking to defer deductions to a higher-taxed future year should consider
changing their bonus plans before year-end to set the payment date later than the 2.5-month
window or change the bonus plan’s terms to make the bonus amount not determinable at year end.
• To reduce 2022 taxable income, consider deferring a debt-cancellation event until 2023.
• Sometimes the disposition of a passive activity can be timed to make best use of its freed-up
suspended losses. Where reduction of 2022 income is desired, consider disposing of a passive
activity before year-end to take the suspended losses against 2022 income. If possible 2023 top
rate increases are a concern, holding off on disposing of the activity until 2023 might save more in
future taxes.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting
us, we can tailor a particular plan that will work best for you.
Very truly yours,
