2022 Year-End Tax Planning
With 2022 quickly coming to an end, the time has come to prepare for the upcoming tax filing season and consider any last-minute moves to help put you in the best position possible. April 18, 2023 is the tax filing deadline. It can be extended through October 15 but extending your filing deadline does not extend your payment deadline.
This year hasn’t seen as much tax legislation as prior years, but there are still several key changes that will likely impact you.
First, all the 2020-21 stimulus payments, Advance Child Tax Credit payments and expanded Dependent Care Credits have expired. While there is some discussion of extension in the Congressional lame-duck session, the Child Tax Credit returns to $2,000 per child under 17, and $500 for other dependent credits. The Dependent Care Credit returns to its pre-COVID amount of 20-35% (depending on income) of up to $3,000 in qualifying expenses for one child, or up to $6,000 in expenses for two or more children. No Child Tax Credit payments were made during 2022, so you should receive the full benefit on your tax return this year.
Next, a significant change will be in 1099-K payment thresholds for 2022. Previously, taxpayers received a Form 1099-K from payment processors (such as Stripe or Venmo, or for doing business on sites such as eBay) if they received more than $20,000 with 200 transactions in a year. The threshold has now been lowered to $600, so millions of taxpayers are expected to receive a 1099-K this year. This will be a big change for taxpayers and will need to be reported and handled on your tax return to avoid IRS notices.
The 2022 Inflation Reduction Act provided $80 billion in funding to the Internal Revenue Service to hire 87,000 new employees over 10 years. While only some will be hired for enforcement (i.e., audits), the expectation is that the ~0.5% audit rate on taxpayers making less than $400,000 will increase to approximately 1.5%-2% over the next several years.
The Act also provides for more generous energy efficient credits for homeowners, such as for solar electric, solar hot water, fuel cell, geothermal and biomass fuel. Federal tax credits for electric vehicles and plug-in hybrid cars also remain available.
Moving forward, consider deferring bonuses and other income into 2022 if possible. The additional income this year may push you into a higher tax bracket and increase your tax bill. Inflation has increased the standard deductions and tax brackets significant for 2023, so deferring income into next year will help save on taxes.
Accelerate deductions if you plan to itemize this year. Typical deductions will include medical expenses, mortgage interest, charitable contributions (make sure they are legitimate organizations) and state & local taxes capped at $10,000 (including property taxes and automobile ad valorem taxes). Make sure to obtain receipts and statements for your deductions to help ensure you take advantage of them.
If you cannot itemize, the standard deduction for 2022 is $25,900 for married taxpayers, $19,400 for heads of household and $12,950 for single filers. Those numbers are increasing significantly to $27,700 (married), $20,800 (head of household) and $13,850 (single) for 2023.
Additionally, retirees may wish to contribute any remaining Required Minimum Distributions (RMDs) from their retirement accounts directly to charity. This avoids claiming the income while simultaneously taking advantage of tax benefits for charitable deductions.
You may also increase contributions to your retirement account such as an Individual Retirement Account with a $6,500 limit (plus another $1,000 if you are over 50) or 401(k) or 403(b) through your employer with a $20,500 limit (plus another $6,500 if you are over 50) to boost your savings and reduce your taxable income.
Consider prepaying college tuition if you are eligible to take advantage of benefits such as the American Opportunity Credit or the Lifetime Learning Credit.
You may also wish to sell stock investments that have realized significant losses, especially if you have capital gains that you’d like to shelter from tax. While federal tax law limits capital losses to $3,000 per year for married filers ($1,500 for singles), they can be carried forward to future years or used to offset gains. Alabama does not limit such losses, so that is an added benefit.