With Summer well underway, you may have hit the pause button on thinking about your taxes. Yet the half-year mark is a critical time to hit resume and spend some time thinking about next year’s filing season. Implementing some simple midyear planning ideas can help save you time and money come next April. Here are some midyear planning ideas to consider.
Individual Income Tax Opportunities
- Consider Adjusting Your Tax Withholding or Estimated Payments. If you owed taxes for 2021, you may want to revise your Form W-4. The IRS provides a tax withholding estimator at https://www.irs.gov/individuals/tax-withholding-estimator. If you make estimated tax payments throughout the year, you should review your anticipated income for 2022 to make sure you’re not underpaying or overpaying. If your business is paying pass-through entity tax on your behalf, you may need to adjust your personal state income tax payments to avoid overpayments.
- Take Advantage of Lower Tax Rates on Investment Income. Income from an investment held for more than one year is generally taxed at preferential capital gains rates. Those rates are 0%, 15%, and 20% for most investments. Higher-income individuals may be subject to an additional 3.8% net investment income tax. The rate that applies to you is determined by your taxable income. For example, the 0% rate applies if your 2022 taxable income does not exceed $83,350 for joint filers or $41,675 for other individuals. The 20% rate doesn’t kick in until your taxable income exceeds $517,200 for joint filers and $459,750 for other individuals.
- Sunset of Increased Estate and Gift Tax Exclusion. The 2017 Tax Cuts and Jobs Act (TCJA) amended the basic exclusion amount, doubling it from $5 million to $10 million per individual (as indexed for inflation). Currently, the basic exclusion amount is $12.06 million. In 2025, this increased exclusion period will sunset, and the basic exclusion amount will revert to its pre-2018 levels (indexed for inflation), making estate and gift tax planning even more important as this window closes. The IRS has indicated that individuals who take advantage of the increased exclusion window, whether through gifting or transferring any unused exclusion amounts, will not be subject to claw back (retroactive adjustment).
- Itemized Deduction Planning. Generally, it is best to itemize deductions if your personal expenses, such as mortgage interest, charitable contributions, medical expenses, and taxes exceed the standard deduction. For 2022, joint filers can enjoy a standard deduction of $25,900. The standard deduction for heads of household is $19,400, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,950. However, “bunching” deductions may offer the best of both worlds. For example, you can double up on charitable giving every other year, which may allow you to itemize in the year of the increased donations.
- Deferring and Accelerating Income. Generally, if you expect Adjusted Gross Income (AGI) to be higher in 2022 than in 2023 or anticipate being in the same or a higher tax bracket in 2022, you may benefit by deferring the receipt of income until 2023. Deferring income is advantageous so long as the deferral does not bump you into a higher tax bracket in the succeeding year(s). In limited circumstances, you may benefit by accelerating income into 2022. For example, if you anticipate being in a higher tax bracket in 2023 than in 2022 or need additional income to take advantage of an offsetting deduction or credit that will not be available in future tax years, it may make sense to accelerate the receipt of income.
- Defer Taxes by Investing in Qualified Opportunity Funds. An investment in Qualified Opportunity Zone property through a Qualified Opportunity Fund (QOF) within 180 days of realizing a gain can temporarily defer tax on the amount of eligible gains, and, in some situations, can permanently exclude 10% or 15% of invested eligible gain. You can defer tax on eligible gains invested in a QOF until the earlier of (1) an inclusion event, or (2) December 31, 2026. Eligible gains include both capital gains and qualified Section 1231 gains.
- Residential Energy Efficient Property Credit. Tax incentives are available if you install certain energy-efficient properties, such as solar electric property, solar water heaters, geothermal heat pumps, small wind turbines, and fuel cell property. The credit equals a percentage of the expenditures incurred for such property.
- American Opportunity and Lifetime Learning Tax Credits for Education. The American Opportunity Tax Credit (AOTC) is available for qualified tuition and fees paid on behalf of a student (i.e., you, your spouse, or a dependent) who is enrolled on at least a half-time basis. The maximum credit is $2,500 and is available for the first four years of the student’s post-secondary education. The Lifetime Learning Credit (LLC) is available for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate, and professional degree courses along with courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. For 2022, the maximum credit is $2,000. Both credits phase out at modified AGI levels between $160,000 and $180,000 for married filing joint taxpayers and between $80,000 and $90,000 for single taxpayers. Tax planning for these credits can create eligibility for family members with lower income.
- Retirement Planning
- 401(k) Plans. The 401(k) elective deferral limit is $20,500 for 2022 plus $6,500 catch-up contributions if you reach age 50 by December 31st. If you are not contributing the maximum amount permitted to your 401(k) account, you still have time to increase contributions for the remainder of the year.
- Traditional IRA. If you are not an active participant in an employer retirement plan you may make deductible contributions to an IRA. The deadline for 2022 contributions is April 18, 2023. The annual deductible contribution limit for an IRA for 2022 is $6,000 plus a $1,000 catch-up contribution for taxpayers age 50 or older by the close of 2022.
- Roth IRA. This type of IRA allows you to make nondeductible contributions of up to $6,000 ($7,000 if making an eligible catch-up contribution) for 2022. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after contribution and the individual has reached age 59½. The maximum contribution is phased out in 2022 for persons with an AGI from $204,000 to $214,000 for married taxpayers filing jointly and $129,000 to $144,000 for single taxpayers.
- Roth IRA Conversions. Funds in a traditional IRA (including SEPs and SIMPLE IRAs), 401(a) qualified retirement plan, 403(b) tax-sheltered annuity, or 457 government plan may be rolled over into a Roth IRA. No penalties will apply if all the requirements for such a transfer are satisfied.
- Required Minimum Distributions (RMD). If you are turning 72 in 2022 and taking your first RMD, you have until April 1, 2023, to do so. For each subsequent year, your RMD must be taken by December 31st.
- IRA Donations to Charity. If you are 70½, you can make direct contributions from your IRA to charity of up to $100,000 during 2022, but you can’t claim a charitable contribution deduction. Conversely, the amounts are not included in your taxable income and can be used to satisfy your RMD.
- Contributions to 529 Plans. A 529 plan allows you to save for future education expenses in a tax-advantaged savings plan. These plans generally are available in the form of a prepaid tuition plan or a more traditional investment account that grows tax-deferred if used for qualified education expenses. Besides college expenses, 529 distributions may be made tax-free for elementary and secondary tuition of up to $10,000 per year per student. They can also be used to pay up to $10,000 of student loans per beneficiary. Up to $16,000 in contributions to a 529 Plan are free from federal gift taxation ($32,000 for a married couple filing jointly). Under a special rule, you can “front-load” five years’ worth of annual gift tax exclusions and makeup to an $80,000 contribution per beneficiary in 2022 ($160,000 if gift-splitting with a spouse). Illinois allows a deduction of $10,000 for single taxpayers ($20,000 for MFJ) for contributions to the state’s Bright Start and College Illinois plans.
Planning for Businesses
- 20% Qualified Business Income Deduction. A hallmark provision of the TCJA, section 199A provides for a 20% deduction to “qualified business income” and certain other types of income. The deduction is available to individuals, estates, and trusts. As with other provisions that came out of the TCJA, this deduction is set to expire for tax years beginning after December 31, 2025. Proper planning, including contributions to retirement plans, can help maximize this deduction for its remaining years.
- Reevaluate Your Retirement Planning. Consider evaluating your company’s retirement plan. Does it provide the owners with an opportunity to maximize contributions? Do employees participate in the plan? Should changes be considered to increase employee participation and possibly improve employee retention? Illinois requires businesses that do not sponsor a retirement plan and have five or more eligible employees to enroll in the state-sponsored Illinois Secure Choice Plan.
- Pass-Through Entity Tax. Your business can elect to pay and deduct your personal state income tax on your behalf. This allows a 100% deduction of this tax by avoiding the $10,000 itemized deduction limit on your personal return. This election is only available for pass-through entities in certain states.
- Depreciation and Section 179 Expense Election. The 179 election allows your business to expense the entire cost of equipment placed in service during the year. For 2022, the maximum deduction is $1,080,000 (with a phase-out beginning at $2,700,000).
- Bonus Depreciation. Business or investment property placed in service in 2022, including certain used property, may be eligible for a 100% bonus depreciation deduction as an alternative to the Section 179 election. Notably, Illinois no longer conforms with the federal bonus depreciation regulations, so if your business is in Illinois consider Section 179 expensing instead of bonus deprecation. The bonus depreciation rate will decrease to 80% for property placed in service in 2023.
- Advantages of Cost Segregation Studies. These studies identify and classify portions of major building construction projects as shorter life properties allowing the use of bonus depreciation and Section 179 expensing. Bonus depreciation allows for a 100% write-off of these short-life assets during the year placed in service. Section 179 can be used for smaller projects.
The professionals at MichaelSilver are ready to help. Our goal is to increase your awareness of tax planning opportunities and potential moves we can make to minimize your taxes before the end of the year. We are continuously monitoring future developments and will keep you informed of the latest tax law changes. Please contact us at 847.982.0333 if you’d like additional details about the topics discussed above or if you just have questions or concerns.
Judy Mason, CPA, CVA – Partner has over 20 years of tax, accounting, business consulting, and compliance experience, serving closely-held and start-up businesses, entrepreneurial and family-owned companies, their owners, and families. Her expertise is in federal, state, and local taxation. Judy has a broad depth of expertise in state and local tax research, planning, and compliance matters for entities and individuals with multi-state businesses and/or investments. She has successfully managed a broad range of federal income, and state sales and use tax audits for entities and individuals. As a Certified Valuation Analyst (CVA), Judy prepares business valuations used for various purposes such as estate and gift planning, business succession, buy/sell agreements, and litigation support.
Marco Loza, CPA – Manager has over seven years of experience at MichaelSilver. His tax expertise includes compliance and planning services for individuals, corporations, partnerships, trusts, and estates. Marco serves on MichaelSilver’s Estate Planning and Automobile Dealership committees and is a graduate of the Driehaus College of Business at DePaul University.