2022 Year-End Income Tax Planning for Businesses
Traditional Year End Tax Planning Techniques
Pay Special Attention To Timing Issues. For most businesses, the last several years have been difficult. The pandemic, disruptions in the supply chain, and difficulty hiring and retaining employees has caused many businesses to face unprecedented challenges. One of the traditional year-end tax planning strategies for businesses includes reducing current year taxable income by deferring taxable income into later years and accelerating deductions into the current one. This strategy has been particularly beneficial where the income tax rate on the business’s income in the following year is expected to be the same or lower than the current year. For businesses that have done well during the pandemic, this strategy would still generally be advisable. Caution! In the following discussions we include “timing” suggestions as they relate to traditional year-end tax planning strategies that would cause you to accelerate deductions into 2022, while deferring income into 2023. However, for businesses that expect their taxable income to be significantly lower in 2022 than in 2023, the opposite strategy might be more advisable. In other words, for struggling businesses, a better year-end planning strategy could include accelerating revenues into 2022 (to be taxed at lower rates), while deferring deductions to 2023 (to be taken against income that is expected to be taxed at higher rates).
Planning With The First-Year 168(k) Bonus Depreciation Deduction. Traditionally, a popular way for businesses to maximize current-year deductions has been to take advantage of the First-Year 168(k) Bonus Depreciation deduction. Before the “Tax Cuts and Jobs Act” (TCJA), which was enacted in late 2017, the 168(k) Bonus Depreciation deduction was equal to 50% of the cost of qualifying new depreciable assets placed in service. TCJA temporarily increased the 168(k) Bonus Depreciation deduction to 100% for qualifying property acquired and placed in service after September 27, 2017 and before January 1, 2023. Planning Alert! After 2022 the 100% §168(k) deduction is to be reduced as follows for property placed in service: 1) During 2023 – 80%, 2) During 2024 – 60%, 3) During 2025 – 40%, 4) During 2026 – 20%, and 5) After 2026 – 0% (with an additional year for long-production-period property and noncommercial aircraft). TCJA further enhanced the 168(k) Bonus Depreciation deduction by making the following changes:
- “Used” Property Temporarily Qualifies For 168(k) Bonus Depreciation. Before TCJA, only “new” qualifying property was eligible for the 168(k) Bonus Depreciation deduction. For qualifying property acquired and placed in service after September 27, 2017 and before 2027, the 168(k) Bonus Depreciation may be taken on “new” or “used” property. Therefore, property that generally qualifies for the 168(k) Bonus Depreciation includes “new” or “used” business property that has a depreciable life for tax purposes of 20 years or less (e.g., machinery and equipment, furniture and fixtures, sidewalks, roads, landscaping, computers, computer software, farm buildings, and qualified motor fuels facilities).
- Annual Depreciation Caps For Passenger Vehicles Increased. Vehicles used primarily in business generally qualify for the 168(k) Bonus Depreciation. However, there is a dollar cap imposed on business cars, and on trucks, vans, and SUVs that have a loaded vehicle weight of 6,000 lbs. or less. More specifically, for qualifying vehicles placed in service in 2022 and used 100% for business, the annual depreciation caps are as follows: 1st year – $11,200; 2nd year – $18,000; 3rd year – $10,800; fourth and subsequent years – $6,460. Moreover, if the vehicle (new or used) otherwise qualifies for the 168(k) Bonus Depreciation, the first-year depreciation cap (assuming 100% business use) is increased by $8,000 (i.e., from $11,200 to $19,200 for 2022). Thus, a vehicle otherwise qualifying for the 168(k) Bonus Depreciation deduction with loaded Gross Vehicle Weight (GVW) of 6,000 lbs. or less used exclusively for business and placed in service in 2022 would be entitled to a depreciation deduction for 2022 of up to $19,200, whether purchased new or used. If the vehicle continues to be used exclusively for business during the second year (i.e., during 2023), it would be entitled to a second-year depreciation deduction of up to $18,000. Planning Alert! Even better, if the same new or used business vehicle (which is used 100% for business) has a loaded GVW over 6,000 lbs., 100% of its cost (without a dollar cap) could be deducted in 2022 as a 168(k) Bonus Depreciation deduction.
- 168(k) Bonus Depreciation Taken In Tax Year Qualifying Property Is “Placed In Service.” The 168(k) Bonus Depreciation deduction is taken in the tax year the qualifying property is “placed in service.” Consequently, if your business anticipates acquiring qualifying 168(k) property between now and the end of the year, the 168(k) Bonus Depreciation deduction is taken in 2022 if the property is placed in service no later than December 31, 2022, if the business has a calendar tax year. Alternatively, the 168(k) Bonus Depreciation deduction can be deferred until 2023 if the qualifying property is placed in service in 2023. However, the 168(k) depreciation deduction is limited to 80% of the basis of the property if placed in service in 2023. Generally, if you are purchasing “personal property” (equipment, computer, vehicles, etc.), “placed in service” means the property is ready and available for use (this commonly means the date on which the property has been set up and tested). If you are dealing with building improvements (e.g., “Qualified Improvement Property”), the date on the Certificate of Occupancy is commonly considered the date the qualifying building improvements are placed in service. Note! Unlike the 179 Deduction (discussed next), the 168(k) Bonus Depreciation deduction is automatically allowed unless the business timely elects out of the deduction. However, the 179 deduction is not allowed unless the business makes an affirmative election to take it.
Planning With The Section 179 Deduction. Another popular and frequently-used way to accelerate deductions is by taking maximum advantage of the up-front Section 179 Deduction (“179 Deduction”). TCJA made several taxpayer-friendly enhancements to the 179 Deduction which include: 1) Substantially increasing the 179 Deduction limitation (up to $1,080,000 for 2022), 2) Increasing the phase-out threshold for total purchases of 179 property ($2,700,000 for 2022), and 3) Expanding the types of business property that qualify for the 179 Deduction. Planning Alert! To maximize your 179 Deductions for 2022, it is important for your business to determine which depreciable property acquired during the year qualifies as 179 Property. The following is a list of the types of business property that qualify for the 179 Deduction (as expanded by TCJA):
- General Definition Of 179 Property. Generally, “depreciable” property qualifies for the 179 Deduction if: 1) It is purchased new or used, 2) It is “tangible personal” property, and 3) It is used primarily for business purposes (e.g., machinery and equipment, furniture and fixtures, business computers, etc.). Off-the-shelf business software also qualifies. Planning Alert! Before TCJA, the 179 Deduction was not allowed for property used in connection with lodging (other than hotels, motels, etc.). TCJA removed this restriction, so the 179 Deduction is now allowed for otherwise qualifying property used in connection with lodging (e.g., the cost of furnishing a home that the owner is renting to others would now qualify).
- Business Vehicles. New or used business vehicles generally qualify for the 179 Deduction, provided the vehicle is used more-than-50% in your business. Planning Alert! As discussed previously in the 168(k) Bonus Depreciation segment, there is a dollar cap imposed on business cars and trucks that have a loaded vehicle weight of 6,000 lbs. or less. If applicable, this dollar cap applies to both the 168(k) Bonus Depreciation and the 179 Deduction taken with respect to the vehicle. Trucks, vans, and SUVs that weigh over 6,000 lbs. are exempt from the annual depreciation caps. In addition, these vehicles, if used more-than-50% in business, will also generally qualify for a 179 Deduction of up to $27,000 if placed in service in 2022 (if placed in service in 2023 the limit will be $28,900). Note! Pickup trucks with loaded vehicle weights over 6,000 lbs. are exempt from the $27,000 limit to the 179 Deduction if the truck bed is at least six feet long. Planning Alert! The $27,000 cap applies only for purposes of the 179 Deduction. This $27,000 cap does not apply with respect to the 168(k) Bonus Depreciation deduction taken on vehicles weighing over 6,000 lbs. Planning Alert! Neither the 179 Deduction nor the 168(k) Bonus Depreciation deduction requires any proration based on the length of time that an asset is in service during the tax year. Therefore, your calendar-year business would get the benefit of the entire 179 or 168(k) Deduction for 2022 purchases, even if the qualifying property was placed in service as late as December 31, 2022!
Salaries For S Corporation Shareholder/Employees. For 2022, an employer generally must pay FICA taxes of 7.65% on an employee’s wages up to $147,000 ($160,200 for 2023) and FICA taxes of 1.45% on wages in excess of $147,000 ($160,200 for 2023). In addition, an employer must withhold FICA taxes from an employee’s wages of 7.65% on wages up to $147,000 ($160,200 for 2023), and 1.45% of wages in excess of $147,000 ($160,200 for 2023). Generally, the employer must also withhold an additional Medicare tax of .9% for wages paid to an employee in excess of $200,000. If you are a shareholder/employee of an S corporation, this FICA tax generally applies only to your W-2 income from your S corporation. Other income that passes through to you or is distributed with respect to your stock is generally not subject to FICA taxes or to self-employment taxes. If the IRS determines that you have taken unreasonably low compensation from your S corporation, it will generally argue that other amounts you have received from your S corporation (e.g., distributions) are disguised “compensation” and should be subject to FICA taxes. Caution! Determining “reasonable” compensation for an S corporation shareholder is a case-by-case determination, and there are no rules of thumb for determining whether the compensation is “reasonable.” However, Court decisions make it clear that the compensation of S corporation shareholders should be supported by independent data (e.g., comparable industry compensation studies), and should be properly documented and approved by the corporation. Planning Alert! Keeping wages low and minimizing your FICA tax could also reduce your Social Security benefits when you retire and the amount of contributions that can be made to your company’s retirement plan on your behalf.
S Corporation Shareholders Should Check Stock And Debt Basis Before Year-End. If you own S corporation stock and you think your S corporation will have a tax loss this year, you should contact us as soon as possible. These losses will not be deductible on your personal return unless and until you have adequate “basis” in your S corporation. Any pass-through loss that exceeds your “basis” in the S corporation will carry over to succeeding years. You have basis to the extent of the amounts paid for your stock (adjusted for net pass-through income, losses, and distributions); plus, any amounts you have personally loaned to your S corporation. Planning Alert! If an S corporation anticipates financing losses through borrowing from an outside lender, the best way to ensure the shareholder gets debt basis is to: 1) Have the shareholder personally borrow the funds from the outside lender, and 2) Then have the shareholder formally (with proper and timely documentation) loan the borrowed funds to the S corporation. Caution! A shareholder cannot get debt basis by merely guaranteeing a third-party loan to the S corporation. Please do not attempt to restructure your loans without contacting us first.
MAXIMIZE YOUR 20% 199A DEDUCTION FOR QUALIFIED BUSINESS INCOME (QBI)
First effective in 2018, the 20% 199A Deduction has had a major impact on businesses. This provision allows qualified taxpayers to take a 20% Deduction with respect to “Qualified Business Income,” “Qualified REIT Dividends,” and “Publicly-Traded Partnership Income.” Of these three types of qualifying income, “Qualified Business Income” (QBI) has had the biggest impact by far on the greatest number of taxpayers.
- “Qualified Business Income.” “Qualified Business Income” (QBI) that is generally eligible for the 20% 199A Deduction, is defined as the net amount of qualified items of income, gain, deduction, and loss with respect to “any” trade or business other than: 1) Certain personal service businesses known as “Specified Service Trades Or Businesses” (described in more detail below), and 2) The Trade or Business of performing services “as an employee” (e.g., W-2 wages). Caution! QBI also generally does not include certain items of income, such as: 1) Dividends, investment interest income, short-term capital gains, long-term capital gains, income from annuities, commodities gains, foreign currency gains, etc.; 2) Any “guaranteed payment” paid to a partner by the partnership; 3) Reasonable compensation paid by an S corporation to a shareholder; or 4) Income you report as an independent contractor (e.g., sole proprietor) where it is ultimately determined that you should have been classified as a “common law” employee.
- W-2 Wage And Capital Limitation On The 20% QBI Deduction. Generally, your 20% QBI Deduction with respect to each Qualified Trade or Business may not exceed the greater of: 1) 50% of the allocable share of the business’s W-2 wages allocated to the QBI of each “Qualified Trade or Business,” or 2) The sum of 25% of the business’s allocable share of W-2 wages with respect to each “Qualified Trade or Business,” plus 2.5% of the business’s allocable share of unadjusted basis of tangible depreciable property held by the business at the close of the taxable year. Note! This limitation, to the extent it applies, is generally designed to ensure that the full 20% of QBI Deduction is available only to qualified businesses that have sufficient W-2 wages, sufficient tangible depreciable business property, or both.
- Owners With Taxable Income Below Certain Thresholds Are Exempt From The W-2 Wage And Capital Limitation! For 2022, an otherwise qualifying taxpayer is entirely exempt from the W-2 Wage and Capital Limitation if the Taxpayer’s “Taxable Income” (computed without regard to the 20%199A Deduction) is $170,050 or below ($340,100 or below if married filing jointly).
- Business Income From “Specified Service Trade Or Businesses” (SSTBs) Does Not Qualify For The 20% 199A Deduction For Owners Who Have “Taxable Income” Above Certain Thresholds. Based on your “Taxable Income” (before the 20% 199A Deduction), all or a portion of your qualified business income from a so-called “Specified Service Trade or Business” (i.e., certain service-type operations discussed in more detail below) may not qualify for the 20% 199A Deduction. More specifically, if your “Taxable Income” for 2022 (before the 20% 199A Deduction) is $170,050 or below ($340,100 or below if married 4 filing jointly), “all” of the qualified business income from your “Specified Service Trade or Business” (SSTB) is eligible for the 20% 199A deduction. However, if for 2022 your “Taxable Income” is $220,050 or more ($440,100 or more if married filing jointly), none of your SSTB income qualifies for the 20% 199A Deduction. Planning Alert! A taxpayer with Taxable Income for 2022 of $170,050 or less ($340,100 or less if married filing jointly) qualifies for two major benefits: 1) The taxpayer’s SSTB income (if any) is fully eligible for the 20% 199A deduction, and 2) The taxpayer is completely exempt from the W-2 Wage and Capital Limitation.
- What Is A “Specified Service Trade Or Business” (SSTB)? A Specified Service Trade or Business (“SSTB“) is generally defined as 1) a trade or business activity involved in the performance of services in the field of: health; law; accounting; actuarial science; performing arts; consulting; athletics; financial services; or brokerage services; 2) a trade or business involving the receipt of fees for celebrity-type endorsements, appearance fees, and fees for using a person’s image, likeness, name, etc.; and 3) any trade or business involving the services of investing and investment management, trading, or dealing in securities, partnership interests, or commodities. An “SSTB” does not include the performance of architectural or engineering services.
- Evaluating Reasonable W-2 Compensation Levels Paid To S Corp Owner/Employees Is More Important Than Ever! Even before the 20% 199A Deduction provision was enacted, S corporation shareholder/employees have had an incentive to pay themselves W-2 wages as low as possible because only the shareholder’s W-2 income from the S corporation is subject to FICA taxes. Other income of the shareholder from the S corporation is generally not subject to FICA or Self-Employment (S/E) taxes. Traditionally, where the IRS has determined that an S corporation shareholder/employee has taken unreasonably “low” compensation from the S corporation, the IRS has argued that other amounts the shareholder has received from the S corporation (e.g., distributions) are disguised “compensation” and should be subject to FICA taxes. Planning Alert! If you want our firm to review the W-2 wages that your S corporation is currently paying to its shareholders in light of this 20% 199A Deduction, please contact us as soon as possible. We will be glad to evaluate your specific situation and make recommendations. Caution! The quicker you contact us on this issue, the better chance you have to take steps before the end of 2022 to increase your 20% deduction.
- Payments By A Partnership To A Partner For Services. A partner’s pass-through share of QBI generally “is eligible” for the 20% 199A Deduction. Moreover, payments by the partnership to the partner that are properly classified as “distributions” neither reduce nor increase the partnership’s QBI that passes through to its partners. However, the following types of payments to a partner by a partnership do reduce the amount of QBI otherwise generated by a partnership, and are also “not eligible” for the 20% 199A Deduction: 1) Any amount that is a “guaranteed payment” paid by the partnership to the partner, or 2) Any amount allocated or distributed by a partnership to a partner for services provided to the partnership where it is ultimately determined that the partner was acting other than in his or her capacity as a partner. Caution! It is not always clear whether specific payments to a partner will be classified as “distributions” (that generally do not reduce the amount of your 20% 199A Deduction), or alternatively fall into one of the two above-listed categories that are not eligible for the 20% 199A Deduction. Often partnerships call distributions to partners “guaranteed payments” when they are not technically guaranteed payments. Generally, guaranteed payments are payments made to partners without regard to the partnership’s income. If payments to partners are merely distributions of profits or advance distributions of profits, they are probably not guaranteed payments and should not be classified as such and should not reduce the QBI of the partnership.
BE CAREFUL WITH EMPLOYEE BUSINESS EXPENSES
Un-Reimbursed Employee Business Expenses Are Not Deductible! For 2018 through 2025, “un-reimbursed” employee business expenses are not deductible at all by an employee. For example, you may not deduct on your income tax return any of the following business expenses you incur as an “employee,” even if the expenses are necessary for your work – Automobile expenses (including auto mileage, vehicle depreciation); Costs of travel, transportation, lodging and meals; Union dues and expenses; Work clothes and uniforms; Otherwise qualifying home office expenses; Dues to a chamber of commerce; Professional dues; Work-Related education expenses; Job search expenses; Licenses and regulatory fees; Malpractice insurance premiums; Subscriptions to professional journals and trade magazines; and Tools and supplies used in your work.
An Employer‘s Qualified Reimbursement Of An Employee‘s Business Expenses Are Deductible By The Employer And Tax-Free To The Employee. Generally, employee business expenses that are reimbursed under an employer’s qualified “Accountable Reimbursement Arrangement” are deductible by the employer, subject to the 50% (100% for 2021 and 2022 if purchased from a restaurant) limit on business meals, and the reimbursements are not taxable to the employee. However, reimbursements under an arrangement that is not a qualified “Accountable Reimbursement Arrangement” generally must be treated as compensation and included in the employee’s W-2, and the employee would get no offsetting deduction for the business expense. Planning Alert! Generally, for a reimbursement arrangement to qualify as an “Accountable Reimbursement Arrangement” – 1) The employer must maintain a reimbursement arrangement that requires the employee to substantiate covered expenses, 2) The reimbursement arrangement must require the return of amounts paid to the employee that are in excess of the amounts substantiated, and 3) There must be a business connection between the reimbursement (or advance) and anticipated business expenses.
Deductions For Business Meals. Generally, only 50% of the cost of business meals (i.e., food and beverages) is deductible. However, for 2021 and 2022 otherwise deductible business food and beverages are 100% deductible if provided by a restaurant. Note! IRS says that “a taxpayer that properly applies the rules of Rev. Proc. 2019-48 may treat the meal portion of a per diem rate or allowance paid or incurred after December 31, 2020 and before January 1, 2023 as being attributable to food or beverages provided by a restaurant.” Therefore, if a taxpayer uses the per diem rules to reimburse or to deduct away from home business meals, the taxpayer does not have to document the meal was provided by a restaurant to deduct 100% of the meal cost since Notice 2021-63 presumes the meal was provided by a restaurant. This special rule only applies – 1) to employers who reimburse employees for meals while traveling away from home on business using the per diem reimbursement amounts allowed and 2) to self-employed individuals who use the meal per diem amounts allowed for self-employed individuals in determining meal deductions while traveling away from home on business. Planning Alert! The 100% deduction for otherwise deductible business food and beverages provided by a restaurant expires for restaurant meals paid or incurred after 2022.
OTHER SELECTED YEAR-END PLANNING CONSIDERATIONS FOR BUSINESSES
IRS Increases Standard Mileage Rates Effective July 1, 2022. The standard mileage rate was increased from 58.5 cents per mile (which was effective for business mileage beginning January 1, 2022) to 62.5 cents per mile effective July 1, 2022. Planning Alert! Be sure to keep proper records of business mileage for 2022 and future years.
Don’t Overlook Simplified Accounting Methods For Certain Small Businesses. The Tax Cuts And Jobs Act (enacted in late 2017) provides the following accounting method relief provisions for businesses with Average Gross Receipts (AGRs) for the Preceding Three Tax Years of $27 Million or Less (for 2022): 1) Generally allows businesses to use the cash method of accounting even if the business has inventories, 2) Allows simplified methods for accounting for inventories, 3) Exempts businesses from applying UNICAP, and 4) Liberalizes the availability of the completed-contract method. Planning Alert! The IRS has released detailed procedures to follow for taxpayers who qualify and wish to change their accounting methods in light of these new relief provisions. Please call our firm for more details.
Don’t Forget To Properly Document And Provide Details For Contributions! Be sure to have the proper documentation for any contributions made during 2022 in order to deduct them against taxable income. The IRS recently denied Hobby Lobby’s donations in the amount of $84.6 million because the FMV and basis of each item were not properly reported on Form 8283, when filed with its return. If you are concerned about what documentation you need to deduct a contribution, please call our firm for help.
SELECTED BUSINESS PROVISIONS THAT EXPIRED AFTER 9/30/21
Below are selected Covid-related provisions you should be aware of that expired after 9/30/21. Be sure to consider the impact of the expiration of these provisions on your business’s year-end planning.
Payroll Tax Credit For Paid Sick Leave. The payroll tax credit for employers’ payments to employees for qualified sick leave expired for sick leave taken after September 30, 2021.
Payroll Tax Credit For Paid Family Leave. The payroll tax credit for employers’ payments to employees for qualified family leave expired for family leave taken after September 30, 2021.
Income Tax Credits For Sick Leave And Family Leave For Self-Employed Individuals. The sick leave and family credits for self-employed individuals provided by the American Rescue Plan Act (ARP) expired for qualifying sick leave or family leave days after September 30, 2021.
Employee Retention Credit Except For Recovery Startup Businesses. The employee retention credit expired for qualifying wages paid after September 30, 2021 except for qualifying wages paid by a recovery startup business for which the credit expired for wages paid after 12/31/21.
Planning Alert! If you didn’t take the Employee Retention Credit on qualifying wages, you can amend Form 941 by filing Form 941-X. Generally, this form must be filed by the later of: 3 years from the date you filed your original return, or 2 years from the date you paid the tax. Caution! The IRS recently warned employers to be aware of organizations offering to help them claim the Employee Retention Credit (ERC) when they may not actually qualify. The IRS said in the warning –“To be eligible for the ERC, employers must have:
• sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
• experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
• qualified as a recovery startup business for the third or fourth quarters of 2021.”
The IRS says, “Some third parties are taking improper positions related to taxpayer eligibility for and computation of the credit. These third parties often charge large upfront fees or a fee that is contingent on the amount of the refund and may not inform taxpayers that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit.” Note! If your company didn’t take the ERC and you believe it may qualify, please call our firm and we will review your information to determine if it does.
SELECTED RECENT DEVELOPMENTS
The Inflation Reduction Act Of 2022. On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA). The IRA, among other things, extends and creates various energy provisions for businesses and introduces: 1) a 15% alternative minimum tax (AMT) and 2) a 1% excise tax, both of which apply to specific corporations beginning in 2023. We want to make you aware of this new legislation, however many of the provisions of the IRA are effective after 2022. Therefore, we believe a detailed discussion of the IRA provisions affecting businesses are beyond the scope of this year-end planning letter. However, the following are a couple of changes made by the Inflation Reduction Act which may affect your year-end planning. If you would like more details about the Inflation Reduction Act of 2022, please call our firm.
- To Qualify For The 2022 EV Credit Final Assembly Must Occur In North America For Electric Vehicles Purchased After August 16, 2022. The IRA made dramatic changes to the credit allowed for electric vehicles purchased after 2022. However, the IRA also changed the requirements to obtain a credit (of up to $7,500) for an electric vehicle (EV) purchased after August 16, 2022. For EVs purchased after August 16, 2022, the final assembly of the vehicle must occur in North America to qualify for the credit. However, this “final assembly requirement” does not apply where the taxpayer entered into a written binding contract to purchase a new qualifying EV before August 16, 2022, but took possession of the EV on or after August 16, 2022. Planning Alert! The IRS says, “If you purchase and take possession of a qualifying electric vehicle after August 16, 2022 and before January 1, 2023, aside from the final assembly requirement, the rules in effect before the enactment of the Inflation Reduction Act for the EV credit apply (including those involving the manufacturing caps on vehicles sold).”
- New “Clean Vehicle Credit” For Vehicles Purchased After 2022 And Before 2033 (Code Section 30D). Prior to the IRA, credits of up to $7,500 were provided for new “Qualified Plug-In Electric Drive Motor Vehicles” and for qualified fuel cell motor vehicles. The IRA provides a new revised credit for “Clean Vehicles” after 2022 and before 2033. A “Clean Vehicle” includes a qualified electric vehicle (EV) as outlined in Section 30D and a qualified fuel cell motor vehicle. Planning Alert! These credits for Clean Vehicles apply to personal-use vehicles and to business vehicles. However, the new Clean Vehicle credit for commercial vehicles discussed next may only be used for depreciable property and may be less restrictive than these general “Clean Vehicle” credits.
- Credit For Qualified Commercial Clean Vehicles Acquired And Placed In Service After 2022 And Before 2033. The credit for Commercial Clean Vehicles is the lesser of 1) 30% of the vehicle’s basis or 2) the cost of the vehicle over the cost of a comparable gas or diesel vehicle, if the vehicle is 100% electric. The 30% credit amount is reduced to 15% if the vehicle has a gasoline or diesel component (i.e., if a hybrid). The maximum credit is $7,500 if the GVWR is less than 14,000 pounds and $40,000 if the GVWR is 14,000 pounds or more. Planning Alert! There are AGI limitations, limitations on the cost of the vehicle, and a requirement that final assembly of the vehicle must occur in North America to qualify for the Clean Vehicle credit discussed above. These limitations do not apply to the Commercial Clean Vehicle Credit. Businesses planning on acquiring electric vehicles should consider this new 2023 credit for Commercial EVs and the Clean Vehicle Credit discussed above before acquiring an electric vehicle in 2022. It may pay to wait until 2023.
Returns Extended To October 17, 2022 Are Now Due February 15, 2023 For Florida, South Carolina, And North Carolina Residents And Businesses. On October 5, 2022 the IRS announced that individuals and businesses in North Carolina and South Carolina have until February 15, 2023, to file various federal individual and business tax returns for 2021. The IRS made a similar announcement on September 29 for Florida residents and businesses. In addition, individuals and businesses in these states may deduct losses from Hurricane Ian since Ian has been declared a federal disaster. Practice Alert! You have the option to deduct any Hurricane Ian loss not covered by insurance on either your 2021 income tax return or on your 2022 income tax return. You should generally take the deduction on the return which produces the most tax benefit. If you are a resident or have a business in one of these states, please call our firm and we will help you decide if it is better to take any loss on your 2021 or 2022 return. In addition, we will gladly provide more details concerning Hurricane Ian relief. Also, more detailed information concerning the Federal Hurricane Ian relief provided for Florida, South Carolina, and North Carolina can be found at https://www.irs.gov/newsroom/help-for-victims-of-hurricane-ian.
2022 Year-End Income Tax Planning for Individuals
HIGHLIGHTS OF TRADITIONAL YEAR-END TAX PLANNING TECHNIQUES
We all know the last several years have been anything but normal. In most years, a traditional year-end tax planning strategy would include reducing your current year taxable income by deferring taxable income into later years and accelerating deductions into the current year. This strategy is particularly beneficial where your income tax rate in the following year is expected to be the same or lower than the current year. Consequently, in the following discussion we include traditional year-end tax planning strategies that would allow you to accelerate your deductions into 2022, while deferring your income into 2023. Caution! For individuals who expect their taxable income to be much lower in 2022 than in 2023, the opposite strategy might be more advisable. That is, for individuals who have experienced a significant drop in income during 2022, a better year-end planning strategy might include accelerating income into 2022 (to be taxed at lower rates), while deferring deductions to 2023 (to be taken against income that is expected to be taxed at higher rates).
Above-The-Line Deductions Can Generate Multiple Tax Benefits. Traditional year-end planning includes accelerating deductible expenses into the current tax year. So-called “above-the-line” deductions reduce both your “adjusted gross income” and your “modified adjusted gross income”, while “itemized” deductions (i.e., below-the-line deductions) do not reduce either adjusted gross income or modified adjusted gross income. Deductions that reduce your adjusted gross income (or modified adjusted gross income) can generate multiple tax benefits such as reducing your taxable income and allowing you to be taxed in a lower tax bracket and freeing up other deductions (and tax credits) that phase out as your adjusted gross income (or modified adjusted gross income) increases. If you think that you could benefit from accelerating above-the-line deductions into 2022, consider the following:
- Identifying Above-The-Line Deductions. Above-the-line deductions include: Deductions for IRA or Health Savings Account (HSA) Contributions; Qualified Student Loan Interest; Qualifying Alimony Payments (if the divorce or separation instrument was executed before 2019); Educator Expenses; and, Health Insurance Premiums for Self-Employed Individuals. Note! For 2018 through 2025, the deduction for moving expenses has been suspended for most individuals. Planning Alert! Generally, active members of the Armed Forces who move pursuant to a military order because of a permanent change of station may still deduct un-reimbursed qualified moving expenses as above-the-line deductions and may exclude the employer reimbursements of those moving expenses from income. In addition, effective for “Divorce or Separation Instruments” executed after 2018, the deduction for alimony payments has also been repealed altogether. The good news, however, is that these alimony payments are no longer taxable to the recipient. Alimony paid under a divorce instrument executed before 2019 will generally be grandfathered under the previous rules. Planning Alert! If you are currently paying or receiving alimony pursuant to a divorce or separation instrument executed before 2019, the tax treatment of the alimony payments does not change. That is, if your alimony payments were deductible before 2019, they should continue to be deductible (and includible in the recipient’s income).
- Accelerating Above-The-Line Deductions. As a cash method taxpayer, you can generally accelerate a 2023 deduction into 2022 by “paying” the deductible item in 2022. “Payment” typically occurs in 2022 if, before the end of 2022: 1) A check is delivered to the post office, 2) Your electronic payment is debited to your account, or 3) An item is charged on a third-party credit card (e.g., Visa, MasterCard, Discover, American Express). Caution! If you post-date the check to 2023 or if your check is rejected, no payment has been made in 2022 even if the check is delivered in 2022. Planning Alert! The IRS says that prepayments of expenses applicable to periods beyond 12 months after the payments are not deductible in 2022.
Itemized Deductions. Although itemized deductions (i.e., below-the-line deductions) do not reduce your adjusted gross income or modified adjusted gross income, they still may provide valuable tax savings. Starting in 2018 and through 2025, recent legislation substantially increased the Standard Deduction. For 2022, the Standard Deduction is: Joint Return – $25,900; Single – $12,950; and Head-of-Household – $19,400. Recent legislation has also made certain changes to the following popular itemized deductions:
- Charitable Contributions. Starting in 2018 (with no sunset date), a charitable contribution deduction is not allowed for contributions made to colleges and universities in exchange for the contributor’s right to purchase tickets or seating at an athletic event (prior law allowed the taxpayer to deduct 80% as a charitable contribution). Planning Alert! If you think your itemized deductions this year could likely exceed your Standard Deduction of $25,900 if filing jointly ($12,950 if single) and you want to accelerate your charitable deduction into 2022, please note that a charitable contribution deduction is allowed for 2022 if the check is “mailed” on or before December 31, 2022, or the contribution is made by a credit card charge in 2022. However, if you merely give a note or a pledge to a charity, no deduction is allowed until you pay the note or pledge. In addition, if you are considering a significant 2022 contribution to a qualified charity (e.g., church, synagogue, or college), it will generally save you taxes if you contribute appreciated long-term capital gain property, rather than selling the property and contributing the cash proceeds to the charity. By contributing capital gain property held more than one year (e.g., appreciated stock, real estate, Bitcoin, etc.), a deduction is generally allowed for the full value of the property, but no tax is due on the appreciation. If instead you intend to use “loss” stocks to fund a charitable contribution, you should sell the stock first and then contribute the cash proceeds. This will allow you to deduct the capital loss from the sale, while preserving your charitable contribution deduction. Caution! As we mention later in our letter, the 100% of AGI limitation for cash charitable contributions by individuals who itemized deductions expired in 2021.
- Casualty Losses. From 2018 through 2025, the itemized deduction for personal casualty losses and theft losses has been suspended. However, personal casualty losses attributable to a Federally-declared disaster continue to be deductible. Planning Alert! Personal casualty losses generally continue to be deductible to the extent the taxpayer has personal casualty “gains” for the same year. In addition, casualty losses with respect to property held in a trade or business or for investment are still allowed. Alert! Returns extended to October 17, 2022 are now due February 15, 2023 for Florida, South Carolina, and North Carolina residents and businesses. On October 5, 2022 the IRS announced that individuals and businesses in North Carolina and South Carolina have until February 15, 2023, to file various federal individual and business tax returns for 2021. The IRS made a similar announcement on September 29 for Florida residents and businesses. In addition, individuals and businesses in these states may deduct losses from Hurricane Ian since Ian has been declared a federal disaster. Practice Alert! You have the option to deduct any Hurricane Ian loss not covered by insurance on either your 2021 income tax return or on your 2022 income tax return. You should generally take the deduction on the return which produces the most tax benefit. If you are a resident or have a business in one of these states, please call our firm and we will help you decide if it is better to take any loss on your 2021 or 2022 return. In addition, we will gladly provide more details concerning Hurricane Ian relief. Also, detailed information concerning the Federal Hurricane Ian relief provided for Florida, South Carolina, and North Carolina can be found at https://www.irs.gov/newsroom/help-for-victims-of-hurricane-ian.
- Medical Expense Deductions. If you think your itemized deductions this year could likely exceed your standard deduction of $25,900 if filing jointly ($12,950 if single), but you do not expect your itemized deductions to exceed your Standard Deduction next year, you could save taxes in the long run by accelerating elective medical expenses (e.g., braces, new eye glasses, etc.) into 2022. Planning Alert! For 2022, you are allowed to take a medical expense itemized deduction only to the extent your aggregate medical expenses exceed 7.5% of your AGI.
- $10,000 Cap On State And Local Taxes. From 2018 through 2025, your aggregate itemized deduction for state and local real property taxes, state and local personal property taxes, and state and local income taxes (or sales taxes if elected) is limited to $10,000 ($5,000 for married individuals filing separately). Foreign real property taxes are not deductible at all unless the taxes are paid in connection with a business or in an activity for the production of income. Planning Alert! You are still allowed a full deduction (i.e., an above-the-line deduction) for state, local, and foreign property or sales taxes paid or incurred in carrying on your trade or business (e.g., your Schedule C, Schedule E, or Schedule F operations). Planning Alert! Most states have enacted legislation allowing partnerships and S corporations to elect to pay state and local income taxes on the partnership’s or S corporation’s income. If this election is made, the state and local taxes paid by the partnership or S corporation are deductible by the entity and reduce the income flowing through to the partners or shareholders. This treatment may be beneficial to owners who have state and local taxes above the $10,000 cap discussed above. If the entity pays the state and local income taxes on its income, the owner does not pay tax on the same income. States either give the partners or S corporation shareholders a state credit or deduction on their personal returns for the state and local tax paid or income reported by the entity. Interestingly, the IRS has approved this avoidance of the $10,000 limitation for state and local taxes on partnership and S corporation income. Please call us if you would like to know more about your state’s law allowing state and local taxes to be paid by the partnership or S corporation.
- Limitations On The Deduction For Interest Paid On Home Mortgage “Acquisition Indebtedness.” The Tax Cuts And Jobs Act (TCJA), reduced the dollar cap for Acquisition Indebtedness incurred after December 15, 2017 from $1,000,000 to $750,000 ($375,000 for married filing separately) for 2018 through 2025. Generally, any Acquisition Indebtedness incurred on or before December 15, 2017 is “grandfathered” and will still carry the $1,000,000 cap. Planning Alert! If you think your itemized deductions this year could likely exceed your Standard Deduction, paying your January, 2023 qualifying home mortgage payment before 2023 should shift the deduction on the interest portion of that payment into 2022.
Postponing Taxable Income May Save Taxes. Generally, deferring taxable income from 2022 to 2023 may also reduce your income taxes, particularly if your effective income tax rate for 2023 will be lower than your effective income tax rate for 2022. Moreover, deferring income from 2022 to 2023 may provide you with the same tax benefits listed previously when you accelerate deductions into 2022 (i.e., Freeing up other deductions and tax credits that phase out as your adjusted gross income or modified adjusted gross income increases; Reducing your modified adjusted gross income below the income thresholds for the 3.8% Net Investment Income Tax; Reducing your household income to a level that allows a “refundable” Premium Tax Credit; or, Reducing your taxable income to a level that maximizes your 20% 199A Deduction). Planning Alert! The deferral of income could cause your 2022 taxable income to fall below the thresholds for the highest 37% tax bracket (i.e., $647,850 for joint returns; $539,900 if single). In addition, if you have income subject to the 3.8% Net Investment Income Tax (3.8% NIIT) and the income deferral reduces your 2022 modified adjusted gross income below the thresholds for the 3.8% NIIT (i.e., $250,000 for joint returns; $200,000 if single), you may avoid this additional 3.8% tax on your investment income. If you are a self-employed individual using the cash method of accounting, consider delaying year-end billings to defer income until 2023. Planning Alert! If you have already received the check in 2022, deferring the deposit of the check does not defer the income. Also, you may not want to defer billing if you believe this will increase your risk of not getting paid.
TAX PLANNING FOR INVESTMENT INCOME (INCLUDING CAPITAL GAINS AND NIIT)
Planning With The 3.8% Net Investment Income Tax (3.8% NIIT). The 3.8% Net Investment Income Tax (3.8% NIIT) applies to the Net Investment Income of higher-income individuals. This tax applies to individuals with modified adjusted gross income exceeding the following thresholds: $250,000 for married filing jointly; $200,000 if single; and $125,000 if married filing separately. The 3.8% NIIT is imposed upon the lesser of an individual’s: 1) Modified adjusted gross income in excess of the threshold, or 2) Net investment income. The 3.8% NIIT not only applies to traditional types of investment income (i.e., interest, dividends, annuities, royalties, and capital gains), it also applies to “business” income that is taxed to a “passive” owner unless the passive income is subject to S/E taxes. If you believe that the 3.8% NIIT may apply to you, call our office so we can discuss possible steps we can take before year-end to help reduce your NIIT exposure.
Traditional Year-End Planning With Capital Gains And Losses. Generally, net capital gains (both short- term and long-term) are potentially subject to the 3.8% NIIT. This could result in an individual filing a joint return with taxable income for 2022 of $517,600 or more ($459,750 or more if single) paying Federal income tax on net long-term capital gains at a 23.8% rate (i.e., the maximum capital gains tax rate of 20% plus the 3.8% NIIT). In addition, an individual’s net short-term capital gains could be taxed as high as 40.8% (i.e., 37% plus 3.8%), for Federal income tax purposes. Consequently, traditional planning strategies involving the timing of your year-end sales of stocks, bonds, or other securities continue to be as important as ever. Caution! Always consider the economics of a sale or exchange first! Note! For individuals filing a joint return with 2022 taxable income of less than $83,350 (less than $41,675 if single), their long-term capital gains and qualified dividends are taxed at a zero percent rate. The zero percent rate for long-term capital gains and qualified dividends is particularly important to lower-income retirees who rely largely on investment portfolios that generate dividends and long-term capital gains. Planning Alert! If you have substantial capital loss carryforwards coming into 2022, consider selling enough appreciated securities before the end of 2022 to decrease your net capital loss to $3,000. Stocks that you think have reached their peak would be good candidates. All else being equal, you should sell the short-term gain (held 12 months or less) securities first. This will allow your net capital loss (in excess of $3,000) to offset your short-term capital gain, while preserving favorable long-term capital gain treatment for later years.
REMEMBER CHANGES TO IRAS AND QUALIFIED RETIREMENT PLANS
Secure Act Imposes A New 10-Year Pay-Out Requirement. Effective for individuals dying after 2019, the Secure Act generally requires a decedent’s entire remaining IRA or qualified account balance to be distributed to a named beneficiary, other than an “eligible designated beneficiary”, by December 31 of the 10th year following the year of the decedent’s death. This required 10-year payout does not apply if the named beneficiary is an “eligible designated beneficiary” which includes the decedent’s spouse, or an individual with a qualified disability, who is chronically ill, or is no more than 10 years younger than the decedent. If the named beneficiary is a child under age 21, the 10-year pay-out requirement does not kick in until the child reaches age 21. Planning Alert! If you currently have an estate plan based on the assumption that the non-spouse beneficiaries of your IRAs or qualified retirement plan accounts will be able to take Required Minimum Distributions (RMDs) over their life expectancies, it might be a good time to review and possibly update your estate plan. We will gladly assist you in determining how this new 10-year payout requirement affects your family’s tax planning. New Development! On February 23, 2022, the IRS issued proposed regulations interpreting this new 10-year rule for beneficiaries that are not “eligible designated beneficiaries.” The proposed regulations proposed to require beneficiaries of individuals dying after April 1st following age 72 to begin required minimum distributions (RMDs) in the calendar year following the year of the decedent’s death and also required any remaining account balance of that beneficiary to be distributed to the beneficiary by the end of the 10th calendar year following the year of the decedent’s death. However, the proposed regulations allowed beneficiaries who were not “eligible beneficiaries” of a decedent dying before April 1st following age 72 to take distributions in any manner as long as the entire account balance of the beneficiary was distributed by the end of the 10th calendar year following the year of the decedent’s death. Most believed that a beneficiary that was not an “eligible designated beneficiary” was not required to take a distribution prior to the 10th calendar year following the decedent’s death whether the decedent died before or after April 1st following the decedent’s turning age 72. Even the IRS’s own publication seemed to say that was the case. The interpretation in the proposed regulations meant that non-eligible beneficiaries of decedents who died in 2020 or 2021 after the April 1st following the decedent’s turning 72 would have a 50% penalty if RMDs were not made in 2021 for beneficiaries of decedents dying in 2020 and in 2022 for decedents dying in 2021. In October 2022, the IRS announced that this provision in the proposed regulations will not be effective prior to 2023. In addition, the IRS said that beneficiaries who are not “eligible designated beneficiaries” of individuals dying in 2020 or 2021 after April 1st following age 72 will not be penalized for failing to take an RMD in 2021 or 2022.
SELECTED MISCELLANEOUS YEAR-END PLANNING CONSIDERATIONS
Consider Contributing The Maximum Amount To Your Traditional IRA. As your income rises and your marginal tax rate increases, deductible IRA contributions generally become more valuable. Also, making your deductible contribution to the plan as early as possible generally increases your retirement benefits. As you evaluate how much you should contribute to your IRA, consider the following limitations. If you are married, even if your spouse has no earnings, you can generally deduct in the aggregate up to $12,000 ($14,000 if you are both at least age 50 by the end of the year) for contributions to you and your spouse’s traditional IRAs. You and your spouse must have combined earned income at least equal to the total contributions. However, no more than $6,000 ($7,000 if at least age 50) may be contributed to either your IRA account or your spouse’s IRA account for 2022. If you are an active participant in your employer’s retirement plan during 2022, your IRA deduction is reduced ratably as your adjusted gross income increases from $109,000 to $129,000 on a joint return ($68,000 to $78,000 on a single return). However, if you file a joint return with your spouse and your spouse is an active participant in his or her employer’s plan and you are not an active participant in a plan, your IRA deduction is reduced as the adjusted gross income on your joint return goes from $204,000 to $214,000. Caution! Every dollar you contribute to a deductible IRA reduces your allowable contribution to a nondeductible Roth IRA. The sum of your contributions for the year to your Roth IRA and to your traditional IRA may not exceed the $6,000/$7,000 limits discussed above. For 2022, your ability to contribute to a Roth IRA is phased out ratably as your adjusted gross income increases from $204,000 to $214,000 on a joint return or from $129,000 to $144,000 if you are single. Planning Alert! Unlike the rule for traditional IRA contributions, the amount you may contribute to a Roth IRA is reduced if your adjusted gross income falls within these phase-out ranges regardless of whether you or your spouse is a participant in another retirement plan.
IRS Increases Standard Mileage Rates Effective July 1, 2022. The standard mileage deduction rate for your deductible business miles was increased from 58.5 cents per mile to 62.5 cents per mile effective July 1, 2022. In addition, the rate for medical and moving mileage increased from 18.0 cents per mile to 22.0 cents per mile. Planning Alert! Be sure to keep proper records for business, medical/moving, and charitable mileage for use as a possible deduction for 2022.
The 20% 199A Deduction For Qualified Business Income. Don’t overlook the 20% Deduction under Section 199A (20% 199A Deduction) with respect to “Qualified Business Income,” “Qualified REIT Dividends,” and “Publicly-Traded Partnership Income.” The 20% 199A deduction does not reduce your adjusted gross income or impact your calculation of self-employment tax. Instead, the deduction simply reduces your taxable income (regardless of whether you itemized deductions or claim the standard deduction). In other words, the 20% 199A Deduction is allowed in addition to your itemized deductions or your standard deduction. Note! The 20% 199A Deduction expires after 2025! It is not feasible to provide a thorough discussion of the 20% 199A Deduction with respect to Qualified Business Income (QBI) in this letter. However, if you own an interest in a business as a sole proprietor, an S corporation shareholder, or a partner in a partnership, you are a very good candidate for the 20% 199A Deduction. If you want more information on the 20% 199A Deduction, please call our firm and we will be glad to provide you with more details.
Gift And Estate Tax Planning. For 2022, a donor can gift $16,000 to each donee. It is not a taxable gift to the donor and gifts are not included in the recipient’s income. That exclusion amount will go to $17,000 in 2023. Planning Alert! Using the annual gift tax exclusion is an effective tool to move assets out of your estate without creating any gift tax.
IRS Advises Taxpayers To Check Withholding Now To Avoid Surprises Later. In a recent news release the IRS reminded taxpayers that taxes are a “pay as you go” system where taxes are paid throughout the year through salary withholding and/or quarterly estimated tax payments. In addition, the IRS encourages taxpayers to use its Tax Withholding Estimator at https://www.irs.gov/individuals/tax-withholding-estimator to ensure they have the correct amount of taxes paid-in before December 31st. Planning Alert! It is especially important to review your withholding if you have had a significant event occur during 2022 such as a job change or loss, additional income stream, marriage, divorce, etc. If you believe your tax liability has been affected because of a significant event, and you have questions, please call our firm so we can discuss.
Consider An Identity Protection PIN For Filing Tax Returns. An Identity Protection PIN (IP PIN) is a six-digit number that takes the place of an individual’s social security number on the individual’s income tax return. Previously, IP PINs were only available to victims of identity theft and individuals in select states who were not victims of identity theft. Beginning in 2021, individuals are able to voluntarily opt into the IP PIN program as a proactive way to protect themselves from tax-related identity theft. Individuals who wish to receive an IP PIN must pass a rigorous identity verification process. In addition, spouses and dependents are eligible for an IP PIN if they can pass the identity proofing process. Individuals wishing to obtain an IP PIN should use the online “Get an IP PIN” tool. If an individual does not already have an account on IRS.gov, the individual must register to validate the individual’s identity. Also, an IP PIN is valid for one calendar year. Therefore, an individual will be issued a new IP PIN each year. If you would like more information about IP PINs, please visit the IRS website at https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin.
HIGHLIGHTS OF PROVISIONS INCLUDED IN THE INFLATION REDUCTION ACT OF 2022
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022. The following is a summary of selected provisions included in the Inflation Reduction Act that could impact your 2022 tax planning.
Extension Of American Rescue Plan Act Premium Tax Credit Provisions Through 2025. The American Rescue Plan Act modified the tables for calculating the Premium Tax Credit. The modification results in a greater Premium Tax Credit than for years prior to 2021. In addition, The American Rescue Plan Act removed the provision denying the Premium Tax Credit where household income exceeded 400% of the Federal Poverty Line. For example, according to the Congressional Budget Office, a 45-year-old single individual with income of $58,000 (450% of the FPL) in 2021 would not have been eligible for the Premium Tax Credit under pre-American Rescue Plan Act law. Under the American Rescue Plan Act, that individual would be eligible for a PTC of about $1,250 for 2021. Both of these provisions were extended by the Inflation Reduction Act of 2022 through 2025.
Credit For Energy Efficient Residential Property Improvements. The credit for residential energy property improvements made to an individual’s principal residence was 10% of the amount paid or incurred up to a maximum $500 lifetime limitation. The credit expired at the end of 2021. The Inflation Reduction Act extends this credit through 2022 and provides a new expanded credit for qualifying improvements to residential property after 2022 and before 2032. The Inflation Reduction Act provides an increased 30% credit generally with an annual $1,200 limitation for qualified energy efficient residential property improvements after 2022 and before 2032. These improvements must be made to a dwelling owned and used by the taxpayer. Planning Alert! If you are planning to make residential property improvements qualifying for the new increased credit, you may want to wait until 2023 since the credit could be much larger. In addition, you would receive no credit in 2022 if you have already exceeded your $500 lifetime limitation for energy efficient improvements prior to 2022.
Modification To Existing EV Credit Qualification For Vehicles Purchased After August 16, 2022. Changes made by the Inflation Reduction Act to the electric vehicle (EV) credits are generally effective for vehicles purchased after 2022. However, for an EV purchased after August 16, 2022, the IRA requires the final assembly of the vehicle to occur in North America to qualify for the credit. However, this “final assembly requirement” does not apply where the taxpayer entered into a written binding contract to purchase a new qualifying EV before August 16, 2022 but took possession of the EV on or after August 16, 2022. Planning Alert! IRS says “If you purchase and take possession of a qualifying electric vehicle after August 16, 2022 and before January 1, 2023, aside from the final assembly requirement, the rules in effect before the enactment of the Inflation Reduction Act for the EV credit apply (including those involving the manufacturing caps on vehicles sold).”
New “Clean Vehicle Credit” For Vehicles Purchased After 2022 And Before 2033. The IRA amends the law to provide credits for “Clean Vehicles” after 2022 and before 2033. A “Clean Vehicle” includes a qualified electric vehicle (EV) and a qualified fuel cell motor vehicle. Taxpayers are allowed a credit for a qualifying EV. The maximum credit amount is $7,500 for new EVs. The vehicle must have a minimum battery capacity of seven kilowatt hours; be manufactured primarily for use on public streets, roads, and highways; have at least 4 wheels, and have a gross vehicle weight rating (GVWR) of less than 14,000 lbs. Caution! No credit will be allowed for a new vehicle if the manufacturer’s suggested retail price of the vehicle exceeds: $80,000 for SUVs, pickups, and vans; and $55,000 for other vehicles. In addition, no credit will be allowed for a new vehicle if the lesser of current or prior year modified adjusted gross income is more than $300,000 for joint filers, $225,000 for head of households, and $150,000 for others. Planning Alert! The IRA removes the disallowance of the EV credit when the number of electric vehicles sold by a manufacturer exceeds 200,000, effective for vehicles sold after December 31, 2022. Because of this 200,000 limitation, vehicles manufactured by GM and Tesla do not qualify for a credit in 2022. However, if these vehicles meet the requirements of the new law, they will qualify if purchased in 2023. So, if you are planning on purchasing an electric vehicle manufactured by Tesla or GM, it may pay to wait until after 2022. Please call our firm if you need additional information and assistance.
Extension And Increase In Individual Energy Credit For “Qualified Fuel Cell Property,” “Qualified Small Wind Energy Property,” “Qualified Solar Electric Property,” “Qualified Solar Water Heating Property,” “Qualified Geothermal Heat Pump Property,” And “Qualified Biomass Fuel Property.” The credit for: 1) “Qualified Fuel Cell Property Expenditures,” 2) “Qualified Small Wind Energy Property Expenditures,” 3) “Qualified Solar Electric Property Expenditures,” 4) “Qualified Solar Water Heating Property Expenditures,” 5) “Qualified Geothermal Heat Pump Property Expenditures,” and 6) “Qualified Biomass Fuel Property Expenditures” was amended by the Consolidated Appropriations Act to be a 26% credit for qualifying property expenditures in 2021 and 2022, with a reduction of the credit to 22% for qualifying property expenditures in 2023 and no credit for expenditures after 2023. The IRA provides that for qualified property expenditures after 2019 and before 2022, the credit is 26%. For qualified property expenditures after 2021 and before 2033, the credit is 30%. In addition, “Qualified Biomass Fuel Property” only qualifies for the credit before 2023. For property expenditures after 2022 “Qualified Battery Storage Technology Expenditures” replace “Qualified Biomass Fuel Property Expenditures” as property qualifying for the credit. Note! This credit for the above qualified energy property applies to expenditures by individuals for the above qualified energy property installed in a dwelling located in the United States and used as a residence by the taxpayer.
HIGHLIGHTS OF INDIVIDUAL PROVISIONS THAT EXPIRED AFTER 2021
Increased Child Tax Credit From $2,000 To $3,000 For Children Age 6 Through 17 And $3,600 For Children Under Age 6. Beginning in 2022, the child tax credit reverts to $2,000 for a qualifying child and $500 for dependents other than qualifying children. The total credits are reduced by $50 for each $1,000 of modified adjusted gross income over: $400,000 for joint filers, and $200,000 for all others. In addition, the credit is no longer fully refundable. Planning Alert! If you are able to take the child credit in 2022, make sure you take this into consideration when estimating your 2022 tax liability.
Refundable And Enhanced Child And Dependent Care Credit. Beginning in 2022, the maximum expenses eligible for the child and dependent care credit revert to $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals. In addition, taxpayers with adjusted gross income over $43,000 will receive a maximum 20% credit of $600 for one qualifying individual and $1,200 for two or more qualifying individuals. Also, the credit is no longer refundable. Note! The advance payment of projected child tax credits expired on December 31, 2021.
Deduction For Charitable Contributions In 2021 For Individuals Who Do Not Itemize. For 2021, the Consolidated Appropriations Act provided an additional standard deduction for cash charitable contributions by individuals who did not itemize. The maximum deduction was $300 for singles and for married individuals filing separately and $600 for married individuals filing joint returns. This deduction expired for taxable years beginning after 2021.
Increased Itemized Deduction For Charitable Contributions. The 100% of AGI limitation for cash charitable contributions by individuals who itemized deductions expired after 2021.