We are nearing the end of the year. There are still a few months left in 2022, so here are some essential tax planning tips you can use. If you would like more detailed and customized guidance, it is recommended that you consult with a tax professional.
Make sure you’ve paid enough taxes during the year. The best time to check if you are withholding enough taxes is now since no one wants a surprise tax bill in April. If you are an employee, compare your income tax withholdings with your income and the tax due on the IRS tax table. Additionally, to income tax withholdings, self-employed individuals should consider self-employment tax, which is 15.3% for the first $147,000 of business income and 2.9% for income above that amount. Those who earn more than $200,000 for single filers or $250,000 for joint filers may also be subject to an additional Medicare tax.
Factors Influencing Year-End Tax Planning in 2021-2022
November 19th, 2021, the House of Representatives passed the Build Back Better Act. The program aims to improve education, healthcare, the environment, and more through social spending measures.
Doesn’t that sound great? But unfortunately, there are major tax implications for both individuals and businesses. There must be some source of funding, after all.
To get a clear understanding of the most critical tax changes resulting from the Build Back Better Act, consult the following lists:
Changes to Individual Taxes
- Contributions to IRAs shall be limited once the balance reaches $10 million, and minimum distributions shall be increased for the same accounts.
- For incomes over $10 million, there is a new 5% surcharge, plus an additional 3% surcharge for incomes over $25 million.
- Ensure the permanent refundable status of the American Rescue Plan Act Child Tax Credit (CTC)
- Through 2022, extend the temporary expansion of the Earned Income Tax Credit under the American Rescue Plan Act.
- Increase the deduction for state and local taxes from $10,000 to $80,000 by 2030
Here are some tips for individuals
In the case of taxable income below the 25% threshold (e.g., $400,000 for single filers, $450,000 for joint filers), your primary concern is whether to realize your profits before year-end. Investing the money in a Qualified Opportunity Fund is an effective way to defer capital gains tax.
Make sure you prioritize investment implications over tax results when you sell at the end of the year, regardless of your taxable income.
Business Tax Changes
- For corporations turning profits over $1 billion, a 15% minimum tax is imposed on corporate book income.
- A 1% excise tax is applied to stock repurchases during a taxable year (except for pension contributions, ESOP contributions, and pension contributions).
- Intangible income derived from foreign sources will be deducted at 21.875%.
- Specific multinational corporations will no longer be able to deduct interest expenses.
- Income and deductions should be timed properly.
- In light of all those changes, it is always challenging to know whether income and deductions should be accelerated or deferred.
Generally, we recommend deferring income, which defers taxes and accelerates deductions to reduce taxes. Nevertheless, adjusting this standard way of thinking to the new corporate tax rate, capital gains rate, and the millionaires’ surtax is essential.
Here are some tips for businesses
You have more flexibility here if you use cash accounting. For example, it might be a good idea to delay billing for work until the end of the year so you don’t receive payment until later. Additionally, you can accelerate deductions by buying supplies in bulk, paying bonuses, and settling bills.
Furthermore, it is a good idea to service or purchase machinery and equipment before filing. Afterward, you can decide the best way to deduct your expenses.
If your product takes a long time to sell, consider donating it to charity. Tax deductions are available for this, as I’m sure you know. Fair market value is, however, limited to the lower end of the range.
Your 401(k) Contribution Can Be Maximized
In most cases, you can contribute to your 401(k) retirement plan until the end of the year or your last paycheck. A contribution of $20,500 is allowed in 2022. The maximum contribution for those over 50 is $27,000, plus $6,500 for those 50 or older. There are no limits on employer contributions. For 2022, you and your employer can contribute up to $61,000 together.
Now is the time to take action, as your last paycheck will be here sooner than you think. Your employer’s human resources department typically requests a retirement contribution increase. To ensure you have yet to reach the contribution limit, you should know how much you contributed this year.
Make a donation to your favorite charity.
You can save on taxes by donating to your favorite charity before the end of the year in addition to helping someone in need.
To claim charitable donations, you must itemize your deductions. For itemizing, you must have more deductions than your standard deduction.
The IRS allows you to reduce your tax bill by a flat amount based on your filing status with the IRS. Despite the highest inflation in decades, standard deductions have been getting larger as the tax agency adjusts them.
The standard deduction amounts for the 2022 tax year — meaning the taxes you’ll file in 2023 — are as follows:
- In the case of single filers and married filers filing separately, the tax is $12,950
- Heads of households are entitled to $19,400
- A married taxpayer filing jointly or a widow(er) filing jointly is entitled to a tax credit of $25,900
Be sure your favorite charitable organization can receive tax-deductible donations before giving. You can use the IRS’ Tax Exempt Organization Search Tool to find out which nonprofit organizations have tax-exempt status.
Depending on what information you can find, either the organization’s name or its employer identification number (EIN) will be needed.
Conclusion
A tax professional can make your year-end tax planning much easier, whether you’re an individual or a business. With this guide handy, you’ve covered the basics.
If you have any questions about your individual taxes, don’t hesitate to contact us online or by calling (561-246-3393