2022 Year-End Tax Planning Guide – Lexology

2022 Year-End Tax Planning Guide – Lexology

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Over 135 Tax Strategies to Consider in a Changing Economic and Tax Environment
A lot has changed in the past year. As the world has put the pandemic in the rearview mirror, 2022 has seen an increasingly challenging economic environment, originally stemming from supply chain issues and more recently exacerbated by market volatility and persistent inflation. As we enter the holiday season after another difficult year, we hope that you, your family and your loved ones are safe and healthy and can find some light in this season. 
As we near the end of the year, there is still time to position yourself to take advantage of the opportunities afforded under the current tax law to reduce your 2022 tax liability. Our 2022 Year-End Tax Planning Guide highlights select and noteworthy tax provisions and potential planning opportunities to consider for this year and, in some cases, 2023.
Amid the economic uncertainty, which has lingered in the background for much of this year, Congress considered many significant tax changes in 2022, some of which were enacted into law in August with the Inflation Reduction Act (though greatly diminished in size and scope from initial proposals). Among other provisions, the Inflation Reduction Act included new and extended energy tax credits, increased IRS funding for enforcement and two new taxes affecting large corporations. Perhaps more noteworthy was that the most highly debated and publicized tax provisions included in the Build Back Better Act were dropped from the final version of the Inflation Reduction Act, including:
With the midterm elections behind us and the start of a divided government ahead of us, additional tax law changes could make their way through Congress in the remainder of 2022 as well as 2023. However, divided government will usually limit the scope of new tax legislation.
For 2022, with a new fiscal year budget due by December 16, any year-end tax legislation on the horizon would be bipartisan provisions that could be tacked on during the budget reconciliation process. Republican members of Congress will likely advocate for the extension of certain provisions in the Tax Cuts and Jobs Act of 2017, which changed in 2022, such as the tax treatment of research and development expenses and business interest. Meanwhile, Democratic members of Congress may look to extend certain expired provisions in the American Rescue Plan Act of 2021, such as the expanded child tax credit. Some items that could garner bipartisan support include the SECURE Act 2.0 proposals currently pending and narrowing the tax gap through cryptocurrency legislation and clarifications. Can bipartisan support be achieved? Time will tell.
For 2023 (technically, after January 3), with a Republican-controlled House and Democratic-controlled Senate, significant tax legislation is expected to be limited, especially as each party will do their best to position themselves for the next election cycle.
Please check in with us and keep a watchful eye on our Alerts published throughout the year, which contain information on tax developments and are designed to keep you informed while offering tax-saving opportunities.
In this 2022 Year-End Tax Planning Guide prepared by the CPAs, attorneys and enrolled IRS agents of the Tax Accounting Group of Duane Morris LLP, along with contributions from the trust and estate attorneys of our firm’s Private Client Services Practice Group, we walk you through the steps needed to assess your personal and business tax situation in light of both existing and potential new laws, and identify actions needed before year-end and beyond to reduce your 2022 and future tax liabilities.
As we complete another trip around the sun, we are again fielding calls, outreaches and multiyear tax modeling requests from existing and new clients regarding year-end tax planning strategies available to individuals, businesses, estates, trusts and nonprofits. While some significant legislation has passed this year in the form of the Inflation Reduction Act, we have also gained more certainty over future tax rates and provisions in the past year. Now that the midterm elections have concluded and we are looking at a split Congress, the hopes for significant tax changes seem dim. This year sees a heightened level of predictability on where the tax code will be for 2023 and possibly for the next few years―which increases the ability to plan for the future.
For much of this year, the Biden administration attempted to pass the major tax changes contemplated in the Build Back Better Act bill, which we discussed in depth in last year’s guide. Several of the tax provisions in the Build Back Better Act were enacted as part of the Inflation Reduction Act in August. The Inflation Reduction Act included: (1) over 30 new and extended energy credits and provisions; (2) increased IRS funding to improve customer service and increase audits; (3) extension of the excess business loss limitation by two years; (4) enactment of a new corporate alternative minimum tax based on financial statement income; and (5) a new 1 percent excise tax on stock buybacks for publicly traded companies.
A number of tax provisions expired at the end of 2021, including:
In the lame duck session, Congress may seek to tack extensions of some or all of the above expired provisions onto the upcoming budget, which it needs to pass by December 16. Three bills currently remain before Congress that encapsulate the SECURE Act 2.0, which may pass with bipartisan support (see item 48).
Tax provisions regarding cryptocurrency also have the potential to garner bipartisan support in the lame duck session or next year in the split Congress. Most notably, lawmakers on both sides of the aisle are concerned about the broad definition of “broker” under the Infrastructure Investment and Jobs Act of 2021, which may subject nonfinancial intermediaries to increased reporting requirements. In addition, some pending proposals include an exemption for gains of less than $200 in personal transactions and deferring tax liabilities for mining and staking rewards.
While you can depend on TAG for cost-effective tax compliance, planning and consulting services, as well as critical advocacy and prompt action in connection with your long-term personal and business objectives, we are also available for any immediate or last-minute needs you may have or those that Congress may legislate that impact your personal or business tax situation.
With only minor tax changes expected for 2023, the tried-and-true strategies of deferring income and accelerating deductions may be beneficial in reducing tax obligations for most taxpayers in 2022. With minor exceptions, this month is the last chance to develop and implement your tax plan for 2022, but it is certainly not the last opportunity.
For example, if you expect to be in the same tax bracket in 2023 as 2022, deferring taxable income and accelerating deductible expenses can possibly achieve overall tax savings for both 2022 and 2023. However, by reversing this technique and accelerating 2022 taxable income and/or deferring deductions to plan for a higher 2023 tax rate, your two-year tax savings may be higher. This may be an effective strategy for you if, for example, you have charitable contribution carryovers to absorb, your marital status will change next year or your head of household or surviving spouse filing status ends this year. This analysis can be complex, and you should seek professional guidance before implementation. Examine our “Words of Caution” section below for additional thoughts in this regard.
This guide provides tax planning strategies for corporate executives, businesses, individuals, nonprofit entities and trusts. We hope that this guide will help you leverage the tax benefits available to you presently, reinforce the tax savings strategies you may already have in place, or develop a tax-efficient plan for 2022 and 2023.
To help you prepare for an uncertain year-end, below is a quick reference guide of action steps, organized by several common individual scenarios, which can help you reach your tax-minimization goals as long as you act before the clock strikes midnight on New Year’s Eve. Not all of the action steps will apply in your particular situation, but you could likely benefit from many of them. Taxpayers may want to consult with us to develop and tailor a customized plan with defined multiyear tax modeling to focus on the specific actions that you are considering. We will be pleased to help you analyze the options and decide on the strategies that are most effective for you, your family and your business.
Words of Caution: Look Before You Leap
Whether you should accelerate taxable income or defer deductions between 2022 and 2023 largely depends on your projected highest (aka marginal) tax rate for each year. While the highest official marginal tax rate for 2022 is currently 37 percent, you might pay more tax than in 2021 even if you were in a higher tax bracket due to credit fluctuations, compositions of capital gains and dividends, and a myriad of other reasons.
The chart below summarizes the most common 2022 tax rates together with the corresponding taxable income levels presently in place. Effective management of your tax bracket can provide meaningful tax savings, as a change of just $1 in taxable income can shift you into the next higher or lower bracket. These differences can be further exacerbated by other income thresholds throughout the code, discussed later in this guide, such as those for determining eligibility for the child tax credit and qualified business income deductions, among others. Income deferral and acceleration, while being mindful of bracket thresholds, can be accomplished through numerous income strategies discussed in this guide, such as retirement distribution planning, bonus acceleration or deferral, and harvesting of capital gains and losses.
2022 Federal Income Tax Rate Schedule
Tax Rate
Head of Household
Married Couple
$0 – $10,275
$0 – $14,650
$0 – $20,550
$10,276 – $41,775
$14,651 – $55,900
$20,551 – $83,550
$41,776 – $89,075
$55,901 – $89,050
$83,551 – $178,150
$89,076 – $170,050
$89,051 – $170,050
$178,151 – $340,100
$170,051 – $215,950
$170,051 – $215,950
$340,101 – $431,900
$215,951 – $539,900
$215,951 – $539,900
$431,901 – $647,850
Over $539,900
Over $539,900
Over $647,850
While reviewing this guide, please keep the following in mind:
With these words of caution in mind, the following are observations and specific strategies that can be employed in the waning days of 2022 regarding income and deductions for the year, where the tried-and-true strategies of deferring taxable income and accelerating deductible expenses will result in maximum tax savings.
IRS Audits: What Does Increased Funding Mean and How Should You Plan Ahead?
With the passage of the Inflation Reduction Act in August, the Internal Revenue Service will be receiving an additional $80 billion over the next 10 years to increase enforcement activity, improve customer service and update computer systems. Even without this additional funding, audits on high-net-worth and ultra-high-net-worth individuals and other targeted groups were poised to rise as the IRS recovered from the pandemic.
Of the approximately $80 billion in funding earmarked toward the IRS in the Inflation Reduction Act, about $45.6 billion is targeted toward enforcement actions, an increase of almost 70 percent in the enforcement budget over the prior 10-year allotment of $66 billion. Even prior to the passage of the act, the IRS Chief Counsel’s Office earlier this year announced that it was looking to hire 200 experienced attorneys to focus on abusive tax schemes. With this additional funding, more staffing gains are certainly coming.
Even though a large amount of additional funding is available immediately, the IRS may have trouble hiring and bringing on capable staff quickly―although former IRS Commissioner Charles P. Rettig has said they would direct efforts to hiring experienced tax and audit practitioners so revenue gains from enforcement would not be delayed. The Congressional Budget Office estimates that the additional $80 billion in IRS funding will generate an additional $200 billion in tax collection over a 10-year period.
With President Biden heading the executive branch, it is very likely for any additional funding for enforcement to strictly target high-net-worth individuals as well as other select groups. The prior version of his proposed legislation, the Build Back Better Act, specifically stated that “no use of these funds is intended to increase taxes on any taxpayer with taxable income below $400,000,” consistent with the president’s campaign promises. While the Inflation Reduction Act does not contain a similar provision in the body of the law, on August 10, Treasury Secretary Janet Yellen directed in a letter to the IRS commissioner that any additional resources will not be used to increase the audit rate for businesses or households below this $400,000 threshold.
More recently, at the American Bar Association’s 33rd annual Philadelphia Tax Conference in November, the acting commissioner of the IRS Large Business and International Division noted that the division will be increasing its focus on partnerships (one of our projected targeted groups). This looks to be a continuation and expansion of the IRS’ Large Partnership Compliance Program, which started examining applicable returns last fall. This program began its focus on partnerships with assets in excess of $10 million, and with increased funding, it looks poised to grow.
As the year comes to a close, now is the time to look ahead, improve your recordkeeping and be prepared to defend yourself against increased enforcement. If you are contacted by the IRS and informed that your tax return or a component of your return is being audited or adjusted, it is imprudent to ignore it. But we do urge caution here―do not respond directly. Instead, seek the counsel of qualified tax advisers.
For those high- and ultra-high-net-worth individuals, businesses and others (including those noted throughout this guide, such as cryptocurrency and digital asset owners) who are targeted groups in recent or new IRS compliance initiatives, the time to develop a plan and maintain documentation is now. In advance of any IRS examination, you may wish to work with experienced tax counsel to conduct a simulated audit to assess exposure and mitigate risk.
Year-End Tax Planning Quick Reference Action Steps
Below is a quick and easy reference guide of action steps that can help you reach your tax-minimization goals, as long as you act before year end. In this guide, we have identified the best possible action items for you to consider, depending on how your income shapes up as the year draws to a close.
Not all of the action steps will apply in your particular situation, and some may be better for you than others. In addition, several steps can be taken before year-end that are not necessarily “quick and easy” but could yield even greater benefits. For example, perhaps this is the year that you finally set up your private foundation to achieve your charitable goals (see item 113) or maybe you decide it is time to review your estate plan in order to utilize the current unified credit (see items 116-130). Consultation to develop and tailor a customized plan focused on the specific actions that should be taken is paramount.
To help guide your thinking and planning in light of the multiple situations in which you may find yourself at year-end, we have compiled Quick-Strike Action Steps that follow different themes depending on several common situations. Due to the changing legislative environment, you may wish to consider several situations below and identify the most relevant and significant steps for your particular situation.
Quick-Strike Action Step Themes
You expect higher ordinary tax rates in 2023
Increased income
Getting married, subject to marriage penalty
Accelerate income into 2022
Defer deductions until 2023
Accelerate installment sale gain into 2022 (item 105)
Defer SALT payments to 2023 (item 26)
Bunch itemized deductions (item 28)
You expect lower ordinary tax rates in 2023
Income goes down
Accelerate deductions into 2022
Defer income until 2023
Defer income until 2023 (item 4)
Maximize medical deductions in 2022 (item 25)
Prepay January mortgage (item 27)
Consider deduction limits for charitable contributions (items 29 and 30)
Sell passive activities (item 46)
Increase basis in partnership and S corporation to maximize losses (item 47)
Maximize pre-tax retirement contributions (item 49)
Maximize contributions to FSAs and HSAs (items 61 and 62)
You have high capital gains in 2022
Business or property sold
An investment ends
Employee stock is sold
Reduce or defer gains
Invest in qualified opportunity zones (item 11)
Invest in 1202 small business stock (item 35)
Perform a like-kind exchange (item 43)
Harvest losses (item 34)
You have low capital gains in 2022
Carry forward losses
Increase capital gains
Maximize preferential gains rates (item 32)
New Tax Planning Strategies for 2022 and 2023, and Changes to Consider (Items 1 to 22)
1. Receive payments through Venmo, PayPal, CashApp, Uber, DoorDash or Airbnb in 2022? Expect a Form 1099-K in early 2023 due to lower thresholds. For calendar year 2022 and after, a Form 1099-K will be issued when gross payment card transactions for goods or services exceed $600, with no minimum transaction threshold. Prior to the change, the 1099-K filing threshold required $20,000 in gross amounts and more than 200 transactions in a calendar year. If you earn income by providing goods or services through a payment settlement entity or a third-party payment network (such as those listed above), expect to receive a Form-1099K in late January 2023 if you meet the new threshold. For anyone accepting digital payments, even if you’re just splitting a meal out with friends, this could mean a new tax form being received for the first time in early 2023.
Planning Tip—Keep the Form 1099-K with your tax records and ensure you report the applicable income, while also documenting which payments are for personal reasons. Most settlement entities will not be aware whether a transaction is taxable or not, so it is the taxpayer’s responsibility to separate business from personal transactions with proper documentation.
Observation—The popular bank-to-bank transfer system Zelle has stated that it is not subject to the new reporting requirements as it does not hold customer funds and only manages automated clearinghouse transactions, which are not subject to 1099-K reporting. If more and more people leave the payment services that issue 1099-Ks, Congress may be forced to expand the law as written, or the IRS may increase scrutiny on the platform. Time will tell what Zelle’s tax reporting requirements may be in the future.
2. Be aware of the Inflation Reduction Act’s new or expanded energy credits. While the Biden administration’s ambitious Build Back Better Act could not garner the requisite support in Congress to secure the passage of many tax provisions, a myriad of new environmental and energy provisions were contained in the Inflation Reduction Act of 2022, which became law in August 2022. Please see item 68 for a chart summarizing these credits. Some tax credits that may be of interest to individuals and small businesses include:
Energy Efficient Home Improvement Credit
Previously named the nonbusiness energy property credit, this credit has been extended through 2032. The credit is available to taxpayers who made qualifying, energy-efficient improvements to their homes. Beginning with 2023, the available credit will be 30 percent of the costs of all eligible home improvements made during the year. The previous lifetime limit of $500 for the total credit will be increased to a $1,200 annual limit, effective January 1, 2023.
Residential Clean Energy Credit
Previously named the residential energy efficient property credit, this credit was scheduled to sunset at the end of 2023 but has now been extended through 2034. The credit is available for taxpayers who installed solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump and biomass fuel property in their homes. The Inflation Reduction Act increased the maximum percentage available for the credit in 2022 (from 26 percent to 30 percent) and will phase out toward the extensions’ end of life (30 percent in 2022-2032, 26 percent for 2033 and 22 percent in 2034). The credit will no longer be available to installations of biomass heaters and furnaces that were previously eligible, but starting in 2023, the credit will apply to battery storage technology that meets certain capacity requirements. 
New Energy Efficient Home Credit
This credit was available to homebuilders or contractors who manufactured energy-efficient homes through the end of 2021. The available credit was either $1,000 or $2,000 depending on which requirements were satisfied. The credit has been extended and expanded by the Inflation Reduction Act, and is now available through the end of 2032. The maximum available credit has also been increased to $2,500.
Planning Tip—For purposes of the energy efficient home improvement credit, the definition of “qualified energy property” was expanded in the Inflation Reduction Act to include the following:
If your desired property meets the expanded definitions, it may be better to wait to install your property until January 2023 when the provisions under the Inflation Reduction Act go into effect. In addition, the energy efficient home improvement credit will see increased limitations in 2023, so if you are considering one of these properties, it may be best to defer to 2023.
Additionally, because of the expanded qualifying property, Congress deemed that more record retention and identification is required. Starting in 2025, manufacturers and taxpayers must comply with reporting the identification number of certain credit property. We suggest retaining all documents, starting now, related to your installation from both the manufacturer of the property and the installer.
3. Take advantage of new and expanded electric vehicle credits. In addition to the home-related energy credits detailed in the previous section, the Inflation Reduction Act also introduced or extended several credits related to vehicles:
New Clean Vehicle Credit
This was previously named the qualified plug-in electric drive motor vehicle credit and was available for each new plug-in electric drive motor vehicle placed in service during the tax year. In addition to extending the credit through 2032, the act also eliminates the limitation on the number of vehicles eligible for the credit and stipulates that the final assembly of the vehicle must take place in North America.
Credit for Previously Owned Clean Vehicles
This credit is allowed for any previously owned clean vehicle purchased and placed into service after 2022 and is limited to the lesser of $4,000 or 30 percent of the vehicle’s sale price. The credit is disallowed if the buyer meets certain income thresholds, as well as a $25,000 maximum price paid for the vehicle.
New Credit for Qualified Commercial Clean Vehicles
This credit is new and available for any qualifying vehicles acquired and placed in service after December 31, 2022. The maximum credit is impacted by the vehicle’s weight, as vehicles in excess of 14,000 pounds can receive a maximum credit of $40,000, while lighter vehicles are limited to $7,500. The credit for each vehicle is the lesser of either: (1) 15 percent of the vehicle’s basis (30 percent for vehicles not powered by gas or diesel); or (2) the “incremental cost” of the vehicle above what the price for a comparable gas- or diesel-powered vehicle would be.
Planning Tip—Potential buyers should note that if you entered into a binding contract to purchase a new qualifying electric vehicle before August 16, 2022, but did not take possession of the vehicle until on or after that date, you may still claim the plug-in electric vehicle credit based on the rules that were in effect prior to August 16. The final assembly requirement (stipulating that final assembly of the vehicle must take place in North America) also does not apply before that date.
If you purchase and/or take possession of a qualifying electric vehicle between August 16, 2022, and January 1, 2023, the final assembly requirement will apply but otherwise will be subject to the rules existing prior to the enactment of the Inflation Reduction Act. It is important to consider the timing of any purchase of qualifying electric vehicles in order to maximize the tax benefits.
4. Defer income until 2023 to take advantage of inflation adjustments to tax brackets. For 2022, the top individual tax rate remains 37 percent and is applied to joint filers with taxable income greater than $628,301 and single filers with taxable income greater than $523,601. These thresholds will rise in 2023 to $693,750 for joint filers and $578,125 for single filers. It might be advantageous for many taxpayers to accelerate their deductions into 2022, reducing their potential tax liability this year. Additionally, for those who are able, taxpayers should plan to defer income into 2023 to take full advantage of the threshold increases to the tax brackets. While there are many ways to defer your income, waiting to recognize capital gains or exercise stock options are popular options that would not only lower your investment income, but your taxable income as well. Depending on your situation, these strategies could reduce tax due for 2022 and potentially 2023 as well.
5. Be cognizant of COVID-related charitable deductions that have lapsed. For tax years 2020 and 2021, the adjusted gross income (AGI) limitation on charitable contributions made by cash to public charities was increased to 100 percent. This benefit was not extended into 2022 and, as a result, the charitable contribution rules have reverted back to the 60 percent AGI limit on cash contributions (30 percent of AGI for noncash contributions). Another benefit that was not extended into 2022 was the $300 above-the-line charitable deduction for single filers ($600 for joint filers) who did not itemize deductions.
Planning Tip—While it is important to consider any COVID-related tax benefits that have sunset, the charitable deduction is still one of the most generous and advantageous deductions available to a taxpayer. Remember that regardless of form, charitable contributions of money must be supported by a canceled check, bank record or receipt from the donee organization showing the name of the organization, the date of the contribution and the amount of the contribution.
Before making a large contribution, please consult with us to determine the impact on your unique situation and the increased documentation that may be required.
6. Maximize child and dependent care credits. For tax year 2022, the child and dependent care credit will also revert to 2020 levels. The American Rescue Plan Act made the child and dependent care credits refundable for 2021 only. In 2022, taxpayers must have an AGI of less than $15,000 in order to get the maximum credit of $1,050 for one child or $2,100 for two or more children.
However, the phaseout range has also changed back to 2020 levels for higher income taxpayers. For 2022, there is no limit to a taxpayer’s AGI in qualifying for the credit. Thus, in 2022, middle-income taxpayers will receive credit for a smaller amount of their expenses than in 2021, but higher income taxpayers who were phased out completely in 2021 can now claim the credit again.
Planning Tip—As services are provided throughout the year, ask your child care providers for their taxpayer identification numbers and keep track of payments made. Consider whether individuals paid should be classified as household employees for whom you are required to issue a W-2. (See item 65.)
Percentage of Expenses Available for Credit (Based on Income)
34% to 21%
Adjusted gross income
$0 to $15,000
$15,001 to $43,000
$43,001 and above
7. The 2021 enhanced child tax credit is no more for 2022. The American Rescue Plan Act significantly enhanced the child tax credit for tax year 2021 due to the COVID-19 pandemic. However, it reverted to its pre-pandemic levels for 2022. For 2022, the credit returns to a maximum of $2,000 per dependent under the age of 17. Children who are 17 years old do not qualify for the credit this year, because the former age limit (16 years old) returns. As in the years before 2021, the credit begins to phase out at incomes above $400,000 for married filing jointly taxpayers and $200,000 for any other taxpayer status.
In 2022, the tax credit will again be refundable only up to $1,500 (up from $1,400 in 2020 to adjust for inflation), depending on your income, and you must have earned income of at least $2,500 to even be eligible for the refund.
Phaseout Range of Child Tax Credit by Modified Adjusted Gross Income
Single/Married Filing Separately
Head of Household
Married Filing Jointly
Child tax credit – standard $2,000 per child
$200,000 – $240,000
$200,000 – $240,000
$400,000 – $440,000
Planning Tip—The child tax credit computation goes hand-in-hand with modified AGI depending on your level of income. Of course, numerous tax benefits phase out at specified AGI thresholds. Decreasing your AGI could go a long way in maximizing these benefits. For the child tax credit in particular, the credit phases out in $50 increments―meaning that, for some taxpayers, a $1 increase in AGI can trigger a $50 reduction in the credit. 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.
8. Report 2020 COVID-19 retirement distributions on 2022 tax returns. In 2020, individuals who were either infected with COVID-19, had a family member with COVID-19 or experienced adverse financial consequences related to COVID-19 were eligible to take up to $100,000 worth of distributions from their retirement plans and include the distributions as income ratably over a three-year period. Since 2022 is the final year of this period, remember that your 2022 taxable income may include a pro rata portion of one of these distributions.
Planning Tip—If you did take an early distribution from a retirement plan during 2020, you still have the option of repaying it and receiving a refund of the tax paid on any amount previously picked up as income. Let’s say you made a $90,000 distribution from your retirement account in 2020 and reported $30,000 of income in both 2020 and 2021; then in 2022, you decide to pay back the distribution in full. You will be eligible to file an amended tax return and receive a refund for the tax that was paid on the $60,000 of income that was reported in prior years. You will also not be required to report $30,000 of income in 2022 should the distribution be paid back in full.
9. Claim a deduction for casualty and disaster losses. In 2022, Florida suffered major damages from Hurricane Ian that led to a federally declared emergency in the state. On September 29, 2022, the IRS announced tax relief for victims of Hurricane Ian that reside or have a business anywhere in the state of Florida. In addition to the option of claiming disaster-related casualty losses, the IRS has also postponed until February 15, 2023 certain tax-filing and tax-payment deadlines falling on or after September 23, 2022 and before February 15, 2023. This extension applies to the quarterly estimated tax payment normally due on January 17, 2023.
Puerto Rico also endured damages from Hurricane Fiona that resulted in a federally declared emergency. In addition, other states had federally declared disasters for damages caused by other storms, floods and wild fires. If you have any questions about whether an event qualifies, please do not hesitate to ask for clarification.
For tax purposes, any losses attributed to a federally declared emergency in 2022 can be pushed back into 2021, such as the closure of stores, losses on mark-to-market securities and permanent retirement of fixed assets. However, lost revenues and the decline in fair market value of property as a direct result of economic hardships would not constitute a loss under disaster rules.
For victims of these disasters that have not yet filed their 2021 tax returns, these losses can be included with their 2021 returns filed prior to the extended filing deadline of February 15, 2023. For those that have already filed 2021 returns, it is still possible for taxpayers to go back and amend 2021 filings, especially if 2021 profits could be offset with 2022 disaster losses. The subject of disaster losses remains a very complicated matter, and there are many rules and stipulations that would prevent taxpayers from taking advantage of the election. There are also certain reasons why taxpayers would not want to make the election and for these reasons, we recommend consulting with us before delving into the amendment process.
10. Consider a solar installation to capitalize on the expanded credit. With the passage of the Inflation Reduction Act in August, the solar investment tax credit has increased from 26 percent to 30 percent of eligible expenses for projects installed between 2022 and 2032. After 2032, this credit will drop to 26 percent of eligible expenses in 2033 and 22 percent in 2034.
11. Invest in qualified opportunity zones to save on capital gains. Gains can be deferred on the sale of appreciated stock that is reinvested within 180 days into a qualified opportunity fund (QOF). This gain is deferred until the investment is sold or December 31, 2026, whichever is earlier. An individual is able to defer a capital gain as long as the property was sold to an unrelated party. In addition to the deferral of gain, once the taxpayer has held the QOF investment for five years, they are able to increase their basis in the asset by 10 percent of the original gain. Due to this five-year holding period requirement, the QOF investment must have been acquired by December 31, 2021, in order to benefit from this basis step-up.
Although the contribution deadline for this basis increase has passed, a QOF still provides taxpayers the ability to defer capital gains until 2026 or the year in which the investment is sold, whichever is earlier. In addition, tax on the appreciation of the QOF may be avoided if the investment is held for over 10 years.
All states have communities that now qualify. Besides investing in a fund, one can also take advantage of this opportunity by establishing a business in the qualified opportunity zone or by investing in qualified opportunity zone property.
Potential Legislation Alert—In April 2022, bipartisan legislation was introduced that would extend and enhance the opportunity zone program, currently set to expire at the end of 2026. The proposed bill, if enacted, would extend the opportunity zone program to the end of 2028, providing taxpayers a longer deferral period and a longer period in which to invest in opportunity zones. While the legislation had largely stalled since introduction, with the bipartisan support and sponsors it enjoys and the midterm elections now behind us, passage of this legislation seems possible.
12. Remit any payroll tax deferrals by December 31. Under the CARES Act, many employers and self-employed individuals were able to defer deposit and payment of the employer portion of Social Security taxes and self-employment taxes for 2020. Portions of these taxes related to income earned between March 27, 2020, and December 31, 2020, could be deferred, with 50 percent due by December 31, 2021, and the remaining balance due by December 31, 2022. The IRS has recently issued courtesy CP256V notices to taxpayers that elected this deferral of tax as a reminder to remit the final deferred amount on or before December 31, 2022.
If deferral was a part of the tax planning strategy utilized in 2020, it is important that you deposit the final 50 percent of the deferred amount by December 31, 2022. If the remaining balance is not paid by this date, failure to deposit penalties will accrue on the entire amount back to the original deposit due date (over two and a half years).
13. “Welcome” in the new corporate alternative minimum tax. To help pay for the many clean energy tax credits and incentives in the Inflation Reduction Act, a new corporate alternative minimum tax was created. Unlike the pre-2018 corporate alternative minimum tax, which was imposed on taxable income as adjusted, the new corporate alternative minimum tax is imposed on adjusted financial statement income.
Are You Subject to the New AMT?
The new AMT applies only to applicable corporations whose average annual adjusted financial statement income for the three-tax-year period ending with the current tax year exceeds $1 billion. However, special rules apply to members of a multinational group with a foreign parent, which cause the new AMT to apply if the average adjusted financial statement income for the corporation equals or exceeds $100 million. In addition, there are a number of aggregation rules, under which related businesses may be aggregated for purposes of the income test, including a rule that includes income of a partnership in which the corporation is a partner.
What Does Adjusted Financial Statement Income Include?
The new corporate AMT starts with the applicable financial statement, which is a certified statement prepared according to general accepted accounting principles. Therefore, the start to the new corporate AMT will generally be Form 10-K filed with the SEC, or for nonregistrants, the latest annual audited financial statements. This financial statement income is then adjusted for the following items as detailed in the Inflation Reduction Act:
Planning Tip—Since the start of the new corporate AMT is the applicable financial statement, it is important to note that this statement will not contain any tax-favored exclusions, including notably, deferrals of capital gains via an opportunity zone. As a result, businesses nearing or exceeding the thresholds above should exercise caution when considering an investment in an opportunity zone, as deferred gains relating to the opportunity zone may subject the business to additional AMT under the new regime.
14. Take action by year-end to avoid excise tax on stock repurchases. The Inflation Reduction Act of 2022 added a 1 percent excise tax on the value of corporate stock buybacks of publically traded companies, which applies to tax years beginning after December 31, 2022. Only repurchases that are treated as redemptions for tax purposes are subject to the tax, and a $1 million exemption is provided. While there are many questions regarding the tax that have yet to be addressed, if your business is considering a stock repurchase, it would likely be best to act in 2022 rather than wait until 2023.
15. Maximize extended and expiring employer credits. For employers who missed out on taking advantage of the employee retention credit (ERC), there is still time to file an amended employment tax return. Generally, there is a three-year statute of limitations to file an amended return that begins when the original employment tax return was filed. However, with respect to quarterly employment tax returns filed in the second and third quarters of 2021, the statute of limitations was extended to five years. While the ERC was designed to encourage businesses to keep workers on their payroll and support small businesses and nonprofits throughout the coronavirus economic emergency, as the economic recovery progressed, the credit was no longer serving its original purpose and expired on October 1, 2021. In order to qualify for the credit, the business must have paid wages while its operations were either completely or partially suspended by government order or during a quarter in which receipts were down 20 percent or more over the same quarter in 2019. A business may also qualify as a recovery startup business that began operations after February 15, 2020.
Another credit, the family and medical leave credit, has been extended through 2025. In order to qualify for this credit, employers’ written policies must provide at least two weeks of paid leave for eligible full-time employees and paid leave must be at least 50 percent of wages paid during a normal workweek. The credit ranges from 12.5 percent to 25 percent of wages paid to qualified employees who are out for a maximum of 12 weeks during the year.
Finally, the work opportunity tax credit is a nonrefundable credit for employers who employ certain individuals from targeted groups, such as veterans, low-income individuals and ex-felons. The size of the credit depends on the hired person’s target group, the number of individuals hired and the wages paid to each. This credit is also scheduled to expire at the end of 2025.
16. Utilize net operating losses (NOL) thoughtfully. Beginning last year, the option to carry an NOL back to a prior tax year was eliminated (except for farming losses and certain insurance companies). NOLs can still be carried forward indefinitely and are also subject to an additional annual limitation of the lesser of 80 percent of current year taxable income or the NOL carryforward. For example, a taxpayer with 2022 taxable income of $3 million and an NOL carryforward of $4 million from a prior year would be able to apply $2.4 million of the NOL carryforward (80 percent of 2022 taxable income) to offset its 2022 taxable income and carry forward the remaining NOL balance of $1.6 million indefinitely.
Planning Tip—A taxpayer who 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 in future years on the accelerated income and increase the tax value of deferred deductions.
For estimated tax purposes, a corporation (other than a large corporation) anticipating a small NOL for 2022 and substantial profit in 2023 may find it worthwhile to accelerate just enough of its 2023 income (or defer enough of 2022 deductions) to create a small profit in 2022. Doing so would allow the corporation to base its 2023 estimated tax payments on the small amount of 2022 taxable income, rather than pay 2023 estimates on 100 percent of its 2023 taxable income.
If you are in the position to carry an NOL back (farming and certain insurance companies), but expect to report taxable income in future years, it may be worthwhile to forgo the carryback period in order to apply the NOL to future years where tax rates are expected to be higher. Also, it is important to keep in mind that carrying back a loss could have adverse effects on other items of a tax return. Please analyze the scenarios and discuss with a trusted tax adviser before making any decisions.
17. Be careful of excess business loss limitations. The Tax Cuts and Jobs Act of 2017 (TCJA) effectively limited the amount of business losses that taxpayers were able to use to offset other sources of income for tax years 2018-2025. While the CARES Act reversed the excess business loss (EBL) provisions under TCJA for 2018-2020, the EBL limitations came back into force in 2021―meaning that taxpayers again have to monitor and potentially limit business losses under TCJA. This year, the Inflation Reduction Act of 2022 extended the EBL provisions an additional two years, through 2028.
An EBL is defined as the excess of a taxpayer’s aggregate trade or business deductions over the taxpayer’s aggregate gross trade or business income or gain, plus a statutory threshold of $540,000 for joint filers ($270,000 for other filers). Net trade or business losses in excess of $540,000 for joint filers ($270,000 for other filers) are carried forward as part of the taxpayer’s net operating loss to subsequent tax years.
The CARES Act also clarified several gray areas associated with EBL limitations created by TCJA, including:
18. Be sure to receive the maximum benefit for business interest. For 2022, the business interest expense deduction is limited to 30 percent of the adjusted taxable income of the business, applicable at the entity level for partnerships and S corporations. However, certain smaller businesses (with less than an inflation-indexed $27 million in average annual gross receipts for the three-year tax period ending with the prior tax period) are exempt from this limitation.
The deduction limit for net business interest expenses for 2022 is limited to 30 percent of an affected business’ adjusted taxable income. Additionally, the formula to determine adjusted taxable income has yet again changed. For 2022 and forward, depreciation and amortization are no longer allowed to be added back to taxable income when determining the business interest limitation. Interest and taxes are still allowed to be added back.
Planning Tip—Real estate entities, which tend to have larger depreciation and amortization deductions, may want to consider making an irrevocable election out of the business interest regime under IRC 163(j). Doing so would provide no limitation on deducting interest expense; however, the tradeoff is that the entity is required to compute depreciation using the alternative depreciation system, which generally results in longer cost recovery periods and lower annual depreciation deductions.
19. Charitable contribution limits for C corporations revert to pre-CARES Act limits. Corporations are again limited to charitable contributions of 10 percent of taxable income. The passage of the CARES Act in 2020 temporarily increased this limit to 25 percent of taxable income for 2020 and 2021. While the deduction for contribution of food inventory is usually limited to 15 percent of net income, this too was raised to 25 percent for 2020 and 2021; however, this reverted to 15 percent for 2022.
20. Claim a refund of the corporate alternative minimum tax credit. For 2018, the old corporate AMT system was repealed by the TCJA (see item 13 above for discussion of the new corporate AMT system enacted by the Inflation Reduction Act of 2022). Corporations that paid AMT in 2017 and earlier were allowed to carry forward AMT paid as a credit against regular tax. The CARES Act of 2020 allowed corporate taxpayers to claim 100 percent of any remaining credit, regardless of tax liability, in either 2018 or 2019 by filing an amended return for an immediate cash infusion. If your business still has AMT credits remaining, please contact us so we can prepare the necessary filings to get your business’ cash now―and prior to the closing of any statute of limitations to file an amended tax return.
21. Be mindful of PPP forgiveness implications. Congress created the Paycheck Protection Program, better known as “PPP,” back in March 2020 as the COVID-19 pandemic continued to ravage the economy, forcing thousands of businesses to shutter abruptly. The PPP authorized the funding of forgivable loans of up to $10 million per borrower, which qualifying businesses could spend to cover payroll, mortgage interest, rent and utilities expenses. At the end of 2020, Congress approved a second round of PPP funding through the Consolidated Appropriations Act, which also settled the debate as to whether or not taxpayers could deduct, for tax purposes, expenses paid with PPP loan proceeds. In an extremely favorable decision, Congress both excluded the PPP forgiveness from taxable income and also allowed taxpayers to deduct expenses paid for with PPP funding, even if the PPP loan was ultimately forgiven. With this second round of funding occurring largely in early 2021, many taxpayers may have still seen PPP loan forgiveness occurring into 2022.
In order to be considered for PPP loan forgiveness, borrowers need to apply for loan forgiveness within 10 months after the last day of the covered period, generally between eight to 24 weeks from loan disbursement. According to the Small Business Administration (SBA), more than 93 percent of PPP loans had been fully or partially forgiven as of late October 2022. However, the IRS recently has issued guidance addressing improper forgiveness of PPP loans. Even if a PPP loan is forgiven by SBA or the lender, a taxpayer may not exclude the forgiveness from taxable income if (1) a taxpayer was initially ineligible to receive the PPP loan or (2) the forgiveness is based upon misrepresentations or omissions, whether knowingly or unknowingly. The IRS also suggests and encourages taxpayers who want to become tax compliant to file amended returns to include forgiven loan proceed amounts in income if they have inappropriately received forgiveness of their PPP loans. In short, the IRS is taking it upon themselves to add an additional layer of scrutiny upon the SBA in determining which PPP loans, in fact, should not be forgiven. As the Inflation Reduction Act of 2022 adds approximately $45.6 billion to the IRS’ tax enforcement budget, it is almost certain that PPP loans will become a key area of scrutiny. Be proactive to ensure your PPP loan eligibility and forgiveness is compliant, and be ready to demonstrate proper documentation to support your PPP forgiveness in the months and years ahead.
22. Utilize the Restaurant Revitalization Fund before year-end to minimize reporting requirements. Many food and beverage providers took advantage of the Restaurant Revitalization Fund, which acted as a sort of lifeline for restaurants recovering from the pandemic. While funds do not have to be used until March 11, 2023, reporting on the use of funds is required annually. If a business does not use all funds on eligible expenses by December 31, 2022, additional annual reporting submissions to the SBA will be required until the award is fully expended or the performance period ends on March 11, 2023. Restaurants that are close to using all of the funds may wish to accelerate certain expenses and/or double check eligible expenses to date to ensure the funds are spent before year-end to eliminate future reporting requirements.
Tax Planning Strategies for Individuals (Items 23 to 71)
Virtually any cash-basis taxpayer can benefit from strategies that accelerate deductions or defer income, since it is generally better to pay taxes later rather than sooner (especially when income tax rates are not scheduled to increase). For example, a check you send in 2022 generally qualifies as a payment in 2022, even if the check is not cashed or charged against your account until 2023. Similarly, deductible expenses paid by credit card are not deductible when you pay the credit card bill (for instance, in 2023), but when the charge is made (for instance, in 2022).
With respect to income deferral, cash-basis businesses, for example, can delay year-end billings so that they fall in the following year or accelerate business expenditures into the current year. On the investment side, income from short-term (i.e., maturity of one year or less) obligations like Treasury bills and short-term certificates of deposit is not recognized until maturity, so purchases of such investments in 2022 will push taxability of such income into 2023. For a wage earner (excluding an employee-shareholder of an S corporation with a 50 percent or greater ownership interest) who is fortunate enough to be expecting a bonus, he or she may be able to arrange with their employer to defer the bonus (and tax liability for it) until 2023. However, if any of this income becomes available to the wage earner, whether or not cash is actually received, the bonus will be taxable in 2022. This is known as the constructive receipt doctrine.
23. Review the increased standard deduction. For 2022, the standard deduction has increased slightly to $25,900 for a joint return (an increase of $800) and $12,950 for a single return (an increase of $400). Taxpayers age 65 or older and those with certain disabilities may claim increased standard deductions.
Standard deduction (based on filing status)
Married filing jointly
Head of household
Single (including married filing separately)
Planning Tip—With the standard deduction continuing to increase, many taxpayers who previously itemized may find their total itemized deductions close to or below the standard deduction amount. In such cases, taxpayers should consider employing a “bunching” strategy to postpone or accelerate payments, which would increase itemized deductions. This bunching technique may allow taxpayers to claim the itemized deduction in alternating years, thus maximizing deductions and minimizing taxes over a two-year period. For a more in-depth discussion of bunching, see item 28.
24. Carefully consider obtaining an IP PIN. The Identity Protection (IP) PIN is a six-digit number assigned by the IRS (and known only by the IRS and the taxpayer) that adds an additional layer of protection to the taxpayer’s sensitive tax information. Using an IP PIN prevents someone else from filing a return just by using your Social Security number or Individual Taxpayer Identification Number. Rather, the return must also include your unique IP PIN. While this program was originally only available to confirmed victims of identity theft, the IRS extended its reach to taxpayers who wanted to enroll themselves voluntarily starting in 2021. Receiving and using an IP PIN will further protect your tax information whether you have previously been a victim of identity theft or just want to take precautions to plan ahead and avoid potential identity theft in the future. After you receive your IP PIN from the IRS, it is valid for one calendar year and must be renewed every year after. For greater detail, we previously wrote on this topic in an Alert.
Observation—If your Social Security number has been exposed or compromised, we strongly advise obtaining an IP PIN. While this further layer of protection may seem appealing to those who wish to voluntarily opt-in to the IP PIN program, there are pros and cons that first need to be considered. Having an IP PIN adds an extra task to worry about during tax season: remembering to apply for a new one every year. Additionally, the security of the IP PIN could extend the time it takes for your return to be processed. Filing with the incorrect IP PIN or forgetting yours could also add extra time to the processing of your tax return. Since this program has already been open for more than a year, many of its initial issues have been fixed. Despite having to apply for a new IP PIN each year and deal with the potential delays that come along with the program, the benefits of having the increased security of your taxpayer information will be the deciding factor for many. Some will decide the increased security is worth it, while others may steer away from applying for an IP PIN to avoid the extra hassle of maintaining the protected status.
Planning Tip—The “Get an IP PIN" tool is generally available from mid-January until mid-November each year. While this tool is very effective at safeguarding your tax information, it will require an extensive identity verification process. Additionally, spouses and dependents are eligible for an IP PIN if they can pass the verification process. Once you complete the verification, the IRS should provide your IP PIN to you immediately.
Itemized Deduction Planning
25. Pay any medical bills in 2022. The Consolidated Appropriations Act of 2021 permanently reduced the medical expense deduction floor to 7.5 percent of AGI. In addition, the deduction is no longer an AMT preference item, meaning that even taxpayers subject to the AMT would benefit from deductible medical expenses.
Planning Tip—Pay all medical costs for you, your spouse and any qualified dependents in 2022 if, with payment, your medical expenses are projected to exceed 7.5 percent of your 2022 AGI, as this will lower your tax liability for 2022. You also may wish to accelerate qualified elective medical procedures into 2022 if appropriate and deductible.
Observation—Careful timing of year-end payments remitted by credit card or check can yield tax savings. Eligible medical expenses remitted by credit card before the end of the year are deductible on this year’s return, even if you are not billed for the charge until January. If you pay by check dated and postmarked no later than December 31, it will count as a payment incurred this year even if the payee does not deposit the check until January 1 or later (assuming that the check is honored when first presented for payment).
26. Defer your state and local tax payments into 2023. The limitation of the state and local tax deduction was one of the most notable changes enacted by the TCJA in 2017. In 2022, the deduction limit for state and local income or sales and property taxes of $10,000 per return ($5,000 in the case of a married individual filing separately) remains unchanged, though each year more and more states introduce measures to try and circumvent this limitation, such as pass-through entity tax arrangements that will enable a deduction at the individual level. See the next observation below.
Planning Tip—If you live in a state with either high income, sales or real estate taxes and you are not subject to AMT, this could significantly change your tax calculation. As the year draws to a close, if you have already exceeded the $10,000 in state and local tax payments deductible under current law, you may wish to consider postponing any additional payments into early 2023, where appropriate. For many taxpayers, prepaying state and local taxes will be of no benefit in 2022. Generally, we advise many taxpayers to accelerate deductions into the current year where possible. However, if an additional state or local tax payment has no federal tax benefit in 2022, capitalize on the time value of money and pay the tax in 2023 if you can do so without incurring penalty and interest.
Observation—IRS Notice 2020-75 outlined that “specified income tax payments” are deductible by partnerships and S corporations in computing income or loss and are not taken into account when applying the SALT limitation to a partner in a partnership or shareholder in an S corporation.
As a result, a new type of pass-through entity (PTE) tax strategy has been enacted by many states since the SALT cap of $10,000 was established by TCJA. By imposing an income tax directly on the PTE, a state’s tax on PTE income now becomes a deduction for the PTE for federal income tax purposes.
Currently, 29 states assess such a tax (up from 19 this time last year): Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Mississippi, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia and Wisconsin. The legislatures of Iowa, Pennsylvania and Vermont have proposed PTE tax bills that are still pending. Please contact us to crunch the numbers on this tax to evaluate the potential tax benefits of a workaround strategy.
27. Prepay your January mortgage payment if you will be under the mortgage interest limitation. For acquisition indebtedness incurred after December 15, 2017, the mortgage interest deduction is limited to interest incurred on up to $750,000 of debt ($375,000 in the case of a married individual filing a separate return). The mortgage interest from both a taxpayer’s primary and secondary residences remains deductible up to this balance limit on newer debt. For debt existing prior to December 15, 2017, the limit remains at the pre-TCJA amount of $1 million for original mortgage debt.
Regardless of the date incurred, home equity indebtedness not used to substantially improve a qualified home is no longer deductible. However, if a portion of the funds taken from home equity indebtedness are used to improve the property, an equal percentage of the interest paid on that debt can be deducted.
Planning Tip—It is important to consider how the proceeds of any home equity loans were used in determining whether or not the interest is deductible. While proceeds from home equity loans used to pay general household bills do not result in deductible interest, if you used the proceeds to improve your primary home, such home equity interest may be deductible. Thus, if you have a home equity loan that you originally used for other purposes and are considering home renovations, you may wish to pay off the loan and use it for the new renovations to create deductible interest. In addition, if you are planning to refinance and your total mortgage balance will exceed $750,000, please contact us to ensure you retain maximum deductibility and do not run afoul of certain rules related to refinancing mortgage indebtedness.
28. Consider paying state and local taxes, mortgage interest, medical expenses, charitable gifts, etc. (subject to limits noted within this guide) in the same year as opposed to spreading the payments over two years. By bunching deductions and deferring taxable income along with using AGI‑reducing techniques, you increase the value of all deductions and reduce your overall tax liability.
In considering the strategies noted below, however, keep in mind that if you pay a deductible expense in December 2022 instead of January 2023, you reduce your 2022 tax instead of your 2023 tax, but you also lose the use of your money for one month. Generally, this will be to your advantage from a tax perspective, unless in one month you can generate a better return on use of the funds than the tax savings. In other words, you must decide whether the cash used to pay the expense early should be for something more urgent or more valuable than the increased tax benefit.
Planning Tip—If you have already paid state and local taxes of $10,000 in 2022, waiting to pay state and local taxes until 2023 could be worthwhile―not only in the case tax rates increase in 2023, but also if the $10,000 SALT cap is ever modified or repealed.
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 also 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.
Planning Tip—Though unlikely due to recent mortgage rate increases, you may wish to consider refinancing your mortgage if you can secure a rate two or more points below your current rate. Any points you paid on a previous refinancing that have not been fully amortized would be deductible in full in 2022, as long as the previous mortgage is paid off by the end of the year. In addition, even though the interest paid on a lower-rate mortgage would be less and would result in a smaller tax deduction, it also would improve your monthly cash flow. As noted above, use sound economic planning in your decision-making process rather than viewing every transaction in terms of its tax effect. Contact us for a comprehensive assessment if you are contemplating a refinance.
The following chart illustrates the tax treatment of selected types of interest.
Interest Expense Deduction Summary*
Type of debt
Not deductible
Itemized deduction
Business or above-the-line deduction
Consumer or personal
Taxable investment [1]
Qualified residence [2]
Tax-exempt investment
Trading and business activities
Passive activities [3]
* Deductibility may be subject to other rules and restrictions.
[1] Generally limited to net investment income.
[2] For 2022, including debt of up to $750,000 ($1 million for debt incurred prior to December 16, 2017) associated with primary and one secondary residence. Home equity loan interest deduction is suspended, unless the loan proceeds are used to buy, build or substantially improve the taxpayer’s home securing the loan.
[3] Subject to passive activity rules.
Charitable Contributions
You may wish to consider paying 2023 pledges in 2022 to maximize the “bunching” effect, perhaps through a donor-advised fund (DAF), which is a charitable giving vehicle that can assist with “bunching” of charitable contributions into a given year. This can be useful when you are able to make a donation but have yet to determine the timing of the distributions out of the donor-advised fund or which charities will receive the gift.
Planning Tip—Instead of making contributions in early 2023, you can make your 2023 contributions in December 2022. By making two years of charitable contributions in one year, you would increase the amount of itemized deductions that exceed the standard deduction amount, increasing their value. You could then take the standard deduction in 2023 and again in 2025, years in which you do not make any contributions. If you are looking to maximize your charitable contributions, we can assist with determining whether AGI limitations will apply and the timing of the gifts to fully utilize your deduction.
In addition to achieving a large charitable impact in 2022, this strategy could produce a larger two-year deduction than two separate years of itemized deductions, depending on income level, tax filing status and giving amounts each year.
Investment Interest
This is interest on loans used to purchase or carry property held for investment purposes (e.g., interest on margin accounts, interest on debt used to purchase taxable bonds, stock, etc.). Investment interest is fully deductible to the extent of net investment income, unless incurred to purchase securities that produce tax-exempt income. Net investment income is equal to investment income less deductible investment expenses. Sources of investment income include income from interest, nonqualified dividends, rents and royalties. Investment expenses include depreciation, depletion, attorney fees, accounting fees and management fees. If you bunch your investment expenses in one year so that little or no investment interest is deductible, the nondeductible investment interest can be carried forward to the following year.
By rearranging your borrowing, you may be able to convert nondeductible interest to deductible investment interest. In addition, you may be able to increase your otherwise nondeductible investment interest by disposing of property that will generate a short‑term capital gain. The extra investment interest deduction may even offset the entire tax on the gain. Disposing of property that will generate long‑term capital gain will not increase your investment income unless you elect to pay regular income tax rates on the gain. Accordingly, you should review your debt and investment positions before disposing of such property.
Planning Tip—An election can be made to treat qualified dividend income as nonqualified. This would increase the amount of net investment income, and consequently the amount of deductible investment interest. Although the election would result in qualified dividend income being taxed at the taxpayer’s top marginal income tax rate rather than, in general, at a 20 percent rate, tax savings could result. The only way to determine if this makes sense is to crunch the numbers and see if the overall tax liability decreases. Since investment interest is deductible for AMT purposes, making this election could reduce the AMT.
Medical and Dental Expenses
As discussed in item 25 above, a medical deduction is allowed only to the extent that your unreimbursed medical outlays exceed 7.5 percent of your AGI. To exceed this threshold, you may have to bunch expenses into a single year by accelerating or deferring payment as appropriate.
Planning Tip—Keep in mind that premiums paid on a qualified long-term care insurance policy are deductible as medical expenses. The maximum amount of the deduction is based on the taxpayer’s age. For example, the deduction for such premiums paid for an individual age 40 or younger is limited to $450, while the deduction for an individual age 71 or older is limited to $5,640. These limits are largely unchanged from 2021. Also keep in mind that these limitations are per person, not per tax return―so a married couple where both husband and wife are 71 or older would be entitled to a maximum deduction of $11,280, subject to the 7.5 percent of AGI floor as noted above.
Planning Tip—In certain cases, you may be able to choose an up-front, lump-sum payment for medical services in lieu of a payment plan, such as for a child’s braces. By making a lump-sum payment, the entire cost is credited in the year paid, thereby dramatically increasing your medical expenses for that year. If you prefer to not pay the up-front payment with cash, then you can pay by credit card, which is treated as a lump-sum payment for tax purposes. However, if using a credit card, you must realize that the credit card interest is not deductible. This means you should determine if incurring the interest is worth the increased medical expenses to get you over the 7.5 percent threshold.
Observation—A divorced parent generally can deduct medical payments incurred for his or her child even though the other parent claims the dependency exemption. Also, an adult child may be entitled to a deduction for the medical expenses paid on behalf of a parent, even though the child cannot claim the parent as a dependent because the parent has gross income of at least $4,400 in 2022, generally exclusive of Social Security income.
Charitable Giving
29. Plan for deduction limits when donating noncash charitable contributions. Donating appreciated securities such as stocks, bonds and mutual funds directly to charity allows a taxpayer to avoid taxes on these capital gains, though the deduction for capital gain property is generally limited to 30 percent of AGI.
For personal property, the charitable deduction for airplanes, boats and vehicles may not exceed the gross proceeds from their resale. Form 1098-C must be attached to tax returns claiming these types of noncash charitable contribution. Furthermore, donations of used clothing and household items, including furniture, electronics, linens, appliances and similar items, must be in “good” or better condition to be deductible. You should maintain a list of such contributions together with photos to establish the item’s condition. To the extent they are not in “good condition,” you will need to secure a written appraisal to deduct individual items valued at more than $500.
Observation—Substantiation of charitable contributions has grown in importance in the eyes of the courts and the IRS. If you are thinking of making a large noncash charitable contribution that is not in the form of publicly traded stock, make sure you acquire and maintain the correct information and forms needed to substantiate your deduction. Charitable contributions in excess of $250 must have a written acknowledgment from the organization, while most contributions over $5,000 will require an appraisal. The chart below is a useful guide for determining what you need to have in order to deduct your noncash charitable contribution.
Noncash Contribution Substantiation Guide
Type of donation
Amount donated
Less than $250
$250 to $500
$501 to $5,000
Over $5,000
Publicly traded stock
• Receipt
• Written records
• Acknowledgment
• Written records
• Acknowledgment
• Written records
• Acknowledgment
• Written records
Nonpublicly traded stock
• Receipt
• Written records
• Acknowledgment
• Written records
• Acknowledgment
• Written records
• Acknowledgment
• Written records
• Qualified appraisal
• Form 8283 Section B
• Receipt
• Written records
• Acknowledgment
• Written records
• Acknowledgment
• Written records
• Acknowledgment
• Written records
• Qualified appraisal
• Form 8283 Section B
Vehicles, boats and airplanes
• Receipt
• Written records
• Acknowledgment (or 1098-C)
• 1098-C
• Written records
• Acknowledgment
• Written records
• Qualified appraisal
• Form 8283 Section B
All other noncash donations
• Receipt
• Written records
• Acknowledgment
• Written records
• Acknowledgment
• Written records
• Acknowledgment
• Written records
• Qualified appraisal
• Form 8283 Section B
Volunteer out-of-pocket expenses
• Receipt
• Written records
• Acknowledgment
• Written records
• Acknowledgment
• Written records
• Acknowledgment
• Written records
Planning Tip—Another noncash contribution you may consider is a conservation easement. A conservation easement allows for the permanent use of real property by a government or charity—such as preservation of open space, wildlife habitats or for outdoor recreation. The easements afford the donor a charitable contribution for the difference in the fair market value of the property prior to the grant of the easement less the value of the property after the easement. The deduction is taken in the year of the transfer even though the charity does not receive the property until a later time, if ever.
Conservation easements can have additional benefits that extend beyond federal charitable deductions. At least 14 states have programs that will provide a state tax credit. These programs can be quite involved, and proper procedures with the state must be implemented correctly and timely. However, with the passage of the TCJA and the corresponding SALT limit of $10,000, the IRS has determined that these state credits create an “expectation of a return benefit [that] negates the requisite charitable intent.” Therefore, consultation with a qualified tax professional must be conducted to arrive at the correct charitable conservation easement deduction when a state tax credit is or can be received.
30. Make intelligent gifts to charities. Although there has been much volatility in the stock market this year and the market, as of this writing, is generally still down, gifts of appreciated stock remain a great way to maximize charitable gifting while also avoiding capital gains taxes. Do not give away loser stocks (those that are worth less today than what you paid for them). Instead, sell the shares and take advantage of the resulting capital loss to shelter your capital gains or income from other sources, as explained above. Then give cash to the charity since you just sold the stock and will have the cash on hand. As for winner stocks, give them away to charity instead of donating cash. Under either situation, you recognize multiple tax benefits. When gifting appreciated stock to charity, you not only avoid paying capital gains taxes, gift and estate taxes, but you may be able to deduct the value of the stock for income tax and AMT purposes as well. As always, be aware that gifts to political campaigns or organizations are not deductible.
As in years past, charitable donations are subject to certain AGI limitations. However, unlike in 2020 and 2021, the 100 percent of AGI level for cash donations to a public charity was not extended and has reverted to 60 percent.
Deductions Allowable for Contributions of Various Property
Tangible personal property
Appreciated property
Public charity
60% of AGI
50% of AGI
30% of AGI
Private operating foundation
60% of AGI
30% of AGI
30% of AGI
Private nonoperating foundation
30% of AGI
30% of AGI
20% of AGI
Donor-advised fund
60% of AGI
30% of AGI
30% of AGI
Planning Tip—Another strategy to consider is a charitable remainder trust, where income-producing assets are transferred to an irrevocable trust. The donor or other noncharitable beneficiaries receive trust income for life or for a period of years. The donor receives an upfront charitable contribution equal to the present value of the remainder interest. The charity receives the remaining trust assets when the income interests end. For the estate tax implications of a charitable remainder trust, see item 123. Also, consider the use of donor-advised funds, where you can contribute cash, securities or other assets. Other assets may include valuable antiques, stamp and coin collections, art, cars and boats. You can take a deduction and invest the funds for tax-free growth while recommending grants to any qualified public charity.
Observation—It is important to confirm that the donation you are considering is contributed to an organization that is eligible to receive tax-deductible donations (known as a “qualified charity”). The IRS website has a qualified charity search tool to help you determine eligibility.
31. Consider an investment in a special-purpose entity. As an additional “workaround” to the SALT limitations mentioned previously in item 26, certain states also employ special-purpose entities, which allow taxpayers to make charitable contributions to certain nonprofits (usually schools) while claiming a state tax credit for the contribution. While the taxpayer generally does not receive a federal charitable contribution deduction for the amount of the contribution for which they will receive a state credit, taxpayers often receive a much greater return in tax benefits dollar for dollar than contributions made outside of these special-purpose entity programs. In Pennsylvania, for example, the educational improvement and opportunity scholarship tax credits (EITC/OSTC) allow taxpayers to effectively divert state tax payments to donations to private schools, scholarship organizations, pre-K programs and other education initiatives.
To illustrate, using the Pennsylvania EITC/OSTC program, suppose a taxpayer contributes $50,000 to a special-purpose LLC, which in turn contributes the funds to the EITC/OSTC program. As a member of the LLC, at year end, the taxpayer would receive a K-1 from the entity reporting a Pennsylvania state tax credit for either 75 or 90 percent of the contribution, depending on whether they commit to making this contribution for one or two years, respectively. Assuming a two-year commitment, the taxpayer will receive a $45,000 credit on their Pennsylvania income tax return, reducing the tax owed by $45,000. In addition, the taxpayer would receive a federal income tax charitable contribution deduction for the remaining $5,000. Assuming a 35 percent federal tax bracket, this would result in a federal tax benefit (reduction in tax) of $1,750. Thus, on top of the $45,000 state tax benefit, the total tax benefit from a $50,000 contribution to an EITC/OSTC would be $46,750. By comparison, a contribution to a non-EITC/OSTC qualifying scholarship program would realize a tax benefit of only $17,500 (35 percent of $50,000).
EITC/OSTC contribution
“Normal” charitable contribution
Amount of contribution (A)
Pennsylvania tax credit (B)
Contribution for which no state credit is given (C=A-B)
Federal tax rate (D)
Federal tax savings (E=CxD)
Total federal and state tax benefit (B+E)
Tax-Efficient Investment Strategies
For 2022, the long-term capital gains and qualifying dividend income tax rates, ranging from zero percent to 20 percent, have increased incrementally, as shown below.
Long-Term Capital Gains Rate
Married Filing Jointly
Head of Household
Married Filing Separately
Up to $41,675
Up to $83,350
Up to $55,800
Up to $41,675
$41,676 – $459,750
$83,351 – $517,200
$55,801 – $488,500
$41,676 – $258,600
Over $459,750
Over $517,200
Over $488,500
Over $258,600
In addition, a 3.8 percent tax on net investment income applies to taxpayers with modified adjusted gross income that exceeds $250,000 for joint returns ($200,000 for singles). Here are some ways to capitalize on the lower rates as well as other tax planning strategies for investors.
Planning Tip—The capital gains rates remain largely untouched in 2022 with only small changes to the income thresholds for zero percent, 15 percent and 20 percent rates. Additionally, the zero percent capital gains rate for taxpayers in the lowest two tax brackets (10 or 12 percent) is preserved. Therefore, taxpayers should consider: (1) deferring income into 2023 in order to reduce 2022 income, and thus qualify for the zero percent capital gain rate in 2022, and/or (2) delaying the sale of appreciated long-term capital assets until 2023 if you will be within the 15 percent ordinary income tax bracket in 2023, which again will qualify use of the zero percent capital gain rate in 2023.
32. Maximize preferential capital gains tax rates. To qualify for the preferential lower 20 percent, 15 percent or zero percent capital gains rates, a capital asset must be held for a minimum of one year. That is why it is important when you sell off your appreciated stocks, bonds, investment real estate and other capital assets to pay close attention to the asset’s holding period. If it is less than a year, consider deferring the sale so you can meet the longer-than-one-year period (unless you have short-term losses to offset the potential gain). While it is generally unwise to let tax implications be your only consideration in making investment decisions, you should not ignore them either. Also, keep in mind that realized capital gains may increase AGI, which in turn may reduce your AMT exemption and therefore increase your AMT exposure―although to a much lesser extent than in years past, given the increased AMT exemptions in recent years.
Planning Tip—To take maximum advantage of the spread between capital gain and individual income tax rates, consider receiving qualified employer stock options in lieu of salary to convert ordinary compensation income to capital gain income.
33. Reduce the recognized gain or increase the recognized loss. When selling off stock or mutual fund shares, the general rule is that the shares acquired first are the ones deemed sold first. However, if you choose to, you can specifically identify the shares you are selling when you sell less than your entire holding of a stock or mutual fund. By notifying your broker of the shares you want sold at the time of the sale, your gain or loss from the sale is based on the identified shares. This sales strategy gives you better control over the amount of your gain or loss and whether it is long- or short-term. One downfall of the specific identification method is that you cannot use a different method (e.g., average cost method or first in, first out method) to identify shares of that particular security in the future. Rather, you will have to specifically identify shares of that particular security throughout the life of the investment, unless you obtain permission from the IRS to revert to the first in, first out method.
Planning Tip—In order to use the specific identification method, you must ask the broker or fund manager to sell the shares you identify and maintain records that include both dated copies of letters ordering your fund or broker to sell specific shares and written confirmations that your orders were carried out.
34. Harvest your capital losses. It always makes sense to periodically review your investment portfolio to see if there are any “losers” you should sell. This year, with the markets being in an overall decline, there are likely capital losses lurking somewhere in your portfolio. As year-end approaches, so does your last chance to offset capital gains recognized during the year or to take advantage of the $3,000 ($1,500 for married separate filers) limit on deductible net capital losses, as up to $3,000 of net losses can be used to offset ordinary income reported during the year. However, one must be mindful not to run afoul of the wash-sale rule, discussed in item 37.
Planning Tip—For some, bracket management through harvesting of capital gains may be a good strategy. If you expect to be in a higher tax bracket in the future, perhaps sell assets in the current year, pay tax at a lower tax rate and get a step-up in tax basis. The effect is that you shift recognition of capital gain from a higher future rate to a current lower rate. If you like the investment position, repurchase the same or similar assets to maintain the upside potential and you will not be affected by the wash-sale rules as noted in item 37.
35. Take advantage of Section 1202 small business stock gain exclusion. For taxpayers other than corporations, Section 1202 allows for the potential exclusion of up to 100 percent of the gain recognized on the sale of qualified small business stock (QSBS) that is held more than five years, depending upon when the QSBS was acquired. The gain eligible for exclusion cannot exceed the greater of $10 million or 10 times the aggregate adjusted basis of QSBS stock disposed of during the year. As an alternative, if the stock is held for more than six months and sold for a gain, you can elect to roll over and defer the gain to the extent that new QSBS stock is acquired during a 60-day period beginning on the date of the sale.
Planning Tip—Be aware that if you are harvesting losses to offset gains, the Section 1202 taxable gain will be less than what may have been anticipated. Accordingly, keep the Section 1202 gain exclusion in mind so you do not sell too many losses, resulting in the inability to claim all the losses harvested in 2022. Any excess loss would be carried forward to 2023 and succeeding tax years.
36. Beware of the “kiddie tax.” Generally, any investment income of a child in excess of $2,300 is taxed at the marginal tax rate of the child’s parents, under what is known as the “kiddie tax.” For kiddie tax purposes, a child is defined as someone that has not yet reached the age of 18 by the end of the year, or an 18-year-old or a full-time student ages 19-23 with earned income not exceeding half of their support.
Planning Tip—A child's earned income (as opposed to unearned investment income) is taxed at the child's regular tax rates, regardless of amount. Therefore, to save taxes if you have your own business, consider hiring the child and paying a reasonable compensation.
Observation—The net investment income tax (NIIT) is assessed on a taxpayer-by-taxpayer basis and is not subject to the kiddie tax rules unless the child exceeds the single-filer threshold for triggering NIIT. Therefore, there may still be possible savings in transferring assets to children subject to the kiddie tax if the parent is paying NIIT on the investment income. Of course, any time you are transferring assets, be certain to keep the gift tax in mind.
Planning Tip—Various measures can be taken to avoid or minimize the kiddie tax. Among those measures, consider investing a child’s funds in one or more of the following.
37. Keep the wash-sale rules in mind. Often overlooked, the wash-sale rule provides that no deduction is allowed for a loss if you acquire substantially identical securities within a 61‑day period beginning 30 days before the sale and ending 30 days after the sale. Instead, the disallowed loss is added to the cost basis of the new stock. However, there are ways to avoid this rule. For example, you could sell securities at a loss and use the proceeds to acquire similar, but not substantially identical, investments. If you wish to preserve an investment position and realize a tax loss, consider the following options:
Observation—The wash-sale rules apply directly to the investor, not each individual brokerage account. Selling shares in one account with one broker and then buying them back with another broker is not a workaround solution. If trades are made in different accounts, you are ultimately responsible for wash-sale tracking.
Planning Tip—As discussed later at item 44, since the IRS classifies cryptocurrencies as “property” rather than as securities, wash-sale rules do not apply to them, meaning that a taxpayer can sell a cryptocurrency at a loss and buy it back immediately without having to forego deducting the loss under wash-sale rules. This loss can then be used to offset other capital gains incurred during the tax year.
38. Lower your tax burden with qualified dividends. The favorable capital gain tax rates (20, 15 or zero percent) make dividend-paying stocks extremely attractive, since these preferential lower rates will remain intact for 2022. In recent years, several proposals attempted to increase this rate from 20 percent to 25 percent, or even the highest ordinary tax rate. Though these proposals ultimately failed, they may be considered in future years. However, the best course of action is to act based on current law and consider the makeup of your investment portfolio. Keep in mind that to qualify for the lower tax rate for qualified dividends, the shareholder must own the dividend-paying stock for more than 60 days during the 121-day period beginning 60 days before the stock’s ex-dividend date. For certain preferred stocks, this period is expanded to 90 days during a 181-day period.
Observation—While dividends paid by domestic corporations generally qualify for the lower rate, not all foreign corporation dividends qualify. Only dividends paid by so-called qualified foreign corporations, which include foreign corporations traded on an established U.S. securities market (including American depositary receipts), corporations organized in U.S. possessions and other foreign corporations eligible for certain income tax treaty benefits are eligible for the lower rates. Finally, beware of investments marketed as preferred stocks, which are really debt instruments (e.g., trust preferred securities). Dividends received on these securities are not qualified dividends and therefore do not qualify for the preferential capital gain tax rates.
Planning Tip—To achieve even greater tax savings, consider holding bonds and other interest-yielding securities inside qualified plans and IRAs, while having stocks that produce capital gains and qualified dividend income in taxable accounts. In addition, as a taxpayer approaches retirement, it may be more beneficial to invest in equities outside of the retirement accounts so they may take advantage of the more favorable capital gains rates when they decide to cash-in their investments to satisfy retirement-related expenses.
39. Consider tax-exempt opportunities from municipal bonds, municipal bond mutual funds or municipal ETFs. If you are in a high tax bracket, it may make sense to invest in municipal bonds. Tax‑exempt interest is not included in adjusted gross income, so deduction items based on AGI are not adversely affected. As long as your investment portfolio is appropriately diversified, greater weight in municipal bonds may be advantageous. However, be mindful of the AMT impact on income from private activity bonds, which is still a preference item for AMT purposes. In general, a private activity bond is a municipal bond issued after August 7, 1986, whose proceeds are used for a private (i.e., nonpublic) purpose. Accordingly, review the prospectus of the municipal bond fund to determine if it invests in private activity bonds. Anyone subject to the AMT, including those with incentive stock options, should avoid these funds.
Planning Tip—Tax-exempt interest is not included when calculating the net investment income tax, which, if you are already over the NIIT threshold, should be considered when determining your investment allocations as municipal funds will generate an even larger bang for your buck.
Observation—Depending on what type of tax-exempt securities you invest in and where you live, you could generate interest that is double or triple tax-exempt if the bond is issued by the state or municipality in which you live. Double tax-exempt investment income is income that is not taxed at the federal or state level. If you live in a locality that also has a tax on investment income (like Philadelphia’s school income tax), you may also achieve triple tax-exempt income, which is when your tax-exempt interest is not taxed at the federal, state or local level.
40. Time your mutual fund investments. Before you invest in a mutual fund prior to February 2023, you should contact the fund manager to determine if dividend payouts attributable to 2022 are expected. If such payouts take place, you may be taxed in 2022 on part of your investment. You need to avoid such payouts, especially if they include large capital gain distributions. In addition, certain dividends from mutual funds are not “qualified” dividend income and therefore are subject to tax at the taxpayer’s marginal income tax rate, rather than at the preferential 20 percent, 15 percent or zero percent rates.
Illustration—Since mutual funds are valued based on the net asset value of the fund, if you receive a distribution of $25,000, the value of your original shares declines by $25,000―the amount of the dividend payment. Furthermore, if you are in the automatic dividend reinvestment plan, so that the $25,000 dividend purchases new shares, the value of your fund would now be about the same as your original investment. However, the $25,000 dividend payout is subject to the preferential tax rates. If it is not a “qualified” dividend, it is subject to tax of up to 37 percent. If you had invested after the dividend date, you would own about the same amount of shares but would have paid no tax!
41. Determine if there is worthless stock in your portfolio. Stock that becomes worthless is deductible (generally as a capital loss) in the year it becomes worthless. The loss is calculated based on your basis in the stock, and you may need a professional appraiser’s report or other evidence to prove the stock has no value. In place of an appraisal, consider selling the stock to an unrelated person for at least $1, or writing a letter to the officers of the company stating that you are abandoning the stock. Doing so will eliminate the need for an appraiser’s report and almost guarantees a loss deduction.
Observation—You may not discover that a stock you own has become worthless until after you have filed your tax return. In that case, you are required to file an amended tax return for that year in order to claim a credit or refund due to the loss. For worthless stock, you can amend your return for up to seven years from the due date of your original return or two years from the date you paid the tax, whichever is later. This seven-year lookback is an exception to the normal time frame for amended returns, as the IRS is aware of the difficulty in determining when a security became truly worthless.
42. Consider the greatest tax exclusion hidden in your home. Federal law (and many, but not all, states) provides that an individual may exclude, every two years, up to $250,000 ($500,000 for married couples filing jointly) of gain realized from the sale of a principal residence. To support an accurate tax basis, maintain records, including information on original cost, improvements and additions. The exclusion ordinarily does not apply to a vacation home. However, with careful planning, you may be able to apply the exclusion to both of your homes.
Illustration—If you convert your vacation home to your principal residence, you can then claim the allowable exclusion on your former vacation home. Of course, you would also have to use your former vacation home as your principal residence for a minimum of two years. Establishing residency and use is critical to the success of this technique. Proper conversions result in an additional $250,000/$500,000 of tax‑free gain. However, you may still have taxable gain to the extent of depreciation claimed. The same strategy applies when two individuals are planning to get married and each owns his or her own principal residence. If they do not sell one of the residences before marrying, it may not qualify as a principal residence on a subsequent sale if the residency and use requirements are not met. The result could be a fully taxable sale. If you fail to meet the full two-year principal residence eligibility test, you may qualify for a partial gain exclusion if your home sale was due to a change in workplace location, a health issue or certain unforeseeable events.
Observation—Gain on the sale of a principal residence cannot be excluded if the home was acquired in a like-kind exchange within five years from the date of sale. Therefore, an individual who owns a principal residence, which was originally acquired in a like-kind exchange, must wait five years before selling the property in order to exclude gain up to $250,000 ($500,000 for married couples filing jointly).
Planning Tip—For many individuals, their greatest asset is the appreciated equity in their home. As you advance toward retirement, it is important to consider your home as an investment. If you plan to downsize in later years (e.g., after the kids have left the nest), this exclusion can help you realize up to $250,000 ($500,000 for married couples) of the appreciated equity in your home tax-free. It is commonly regarded as the greatest tax exclusion for most Americans.
43. Consider like-kind exchanges. A like-kind exchange provides a tax-free alternative to selling real property held for investment or for productive use in a trade or business. The traditional sale of property may cause you to recognize and pay taxes on any gain on the sale. A like-kind exchange, on the other hand, allows you to avoid gain recognition through the exchange of qualifying like-kind properties. The gain on the exchange of like-kind property is effectively deferred until you sell or otherwise dispose of the property you receive in the exchange. Since 2018, like-kind exchanges are only available for real property sales. If, as part of the exchange, you also receive other (not like-kind) property or money, you must recognize a gain to the extent of the other property and money received. Losses cannot be recognized.
Observation—Although a like-kind exchange is a powerful tax-planning tool, it includes certain risks. Simply put, it postpones the tax otherwise due on the property exchanged, but it does not eliminate it. The gain will eventually be recognized when the acquired property is sold. If your property that is worth less than your tax basis in it, do not consider a like-kind exchange, as the loss would also be deferred under the like-kind exchange rules. Instead, sell it and take the loss now.
Planning Tip—Like-kind exchanges provide a valuable tax planning opportunity if:
44. Understand the tax implication of any cryptocurrency transactions. The two types of cryptocurrency finance trading exchanges are traditional and decentralized (aka DeFi). Traditional exchanges are centralized financial institutions that require identification of taxpayers such as ID, proof of income and proof of address. On DeFi exchanges, there is no intermediary that holds the cryptocurrency and the taxpayer can remain anonymous. Taxpayers who use traditional exchanges can now expect to receive documentation such as an Excel file or brokerage statement reporting cryptocurrency transactions that occurred throughout the year. On DeFi platforms, taxpayers must track the transactions involving cryptocurrency themselves in order to accurately report their income.
Gains and losses from the sale of cryptocurrencies, just like the sale of stock, must be reported on your tax return. As taxpayers are generally not provided with tax documents detailing sale prices and cost basis, taxpayers must track these items themselves to accurately report their income. Proper recording of basis in cryptocurrency can significantly decrease the capital gains, which may be assessed in the future as stricter reporting requirements are expected to be on the horizon. Language in the Infrastructure Investment and Jobs Act expands the broker and general information reporting obligations to apply to cryptocurrency transactions and signifies that these reporting requirements will go into effect after December 31, 2023. As a result of an estimated $1 trillion dollars of tax evasion related to cryptocurrency, Operation Hidden Treasure began in 2021 to audit and uncover taxpayers who purposefully omit cryptocurrency transactions from their tax reporting.
Observation—On 2022 tax returns, taxpayers are now required to represent on the face of Form 1040 whether or not they had engaged in the sale, exchange or gifting of digital assets (instead of just “virtual currency”―a somewhat narrower definition, which did not include other assets such as non-fungible tokens (NFTs)). This demonstrates the increased IRS focus on cryptocurrency and all digital assets.
Planning Tip—Not only do you have to recognize a gain or loss when you exchange virtual currency for other types of currencies, you also have to recognize the gain or loss upon exchange of the virtual currency for other property and/or services. So if you buy something online with virtual currency, that is a reportable transaction; if you purchase a subscription with virtual currency, that is also a reportable transaction. Because virtual currency is defined as property and not currency, any exchange for any type of value is a reportable tax event. Any movement of any virtual currency is required to be tracked and reported. In short, please do not use virtual currency like regular currency. Speculate on it like a normal investment (if you dare). Your tax accountant may thank you with a smaller bill for your tax return.
Potential Legislation Alert—With the midterm elections now behind us, a bipartisanship push is expected in order to pass new legislation regarding cryptocurrency and all digital assets and ensure greater compliance. The timing and contents of any legislation is uncertain, but the last major piece of guidance was issued back in 2019 and left many questions unanswered. We will continue to monitor the situation and advise as more information becomes available. Stay tuned.
45. Determine your level of participation in activities to either avoid or qualify for passive activity loss treatment. In general, losses from a passive activity are subject to more limitations (and therefore are less beneficial) than active losses. Passive activities generally occur when the taxpayer does not materially participate in the activity. The IRS regulations and statutory authority lay out a number of factors that determine whether an activity should be considered passive. Typically, when an individual spends more than 500 hours participating in an activity during the year, the activity will not be considered passive. There are also other exceptions that allow passive activities to be classified as active, including participation during five of the preceding 10 tax years or having spent 100 hours on the activity during the year, which equals or exceeds the involvement of any other participant. You may also want to generate passive income to utilize passive losses, which would otherwise be suspended.
As for real estate professionals, eligible taxpayers may deduct losses and credits from rental real estate activities in which they materially participate, since they will not be treated as passive and may be used to reduce nonpassive income. An eligible taxpayer, for these purposes, spends more than 750 hours of services during the tax year in real property trades or businesses. In addition, a taxpayer’s personal use, or rental to others, of a vacation home during the last few days of the year may have a substantial tax impact.
46. Do not overlook the advantages of selling passive activities to free up suspended losses. Taxpayers can use passive losses to offset nonpassive income in the year in which they dispose of or abandon their entire interest in the activity in a taxable transaction, whether the transaction results in a gain or a loss.
Planning Tip—If you have sufficient capital gains, you can sell a passive activity for a capital loss, offset the capital loss against the capital gains, and also deduct prior year suspended losses from that passive activity. Should the sale result in a gain, this may still be a sound strategy since the gain will be taxed at a rate lower than the ordinary tax rate permitted for the passive loss. Once again, crunch the numbers to determine the tax impact.
47. Increase your basis in partnerships or S corporations to take advantage of any losses generated by the pass‑through entities. Losses can only be claimed from a flow-through entity if you have sufficient tax basis in the entity. In order to increase your basis and potentially free up losses, you may wish to contribute cash to the entity by either increasing your equity or debt in the venture. Keep in mind that loans made by a third-party lender to an S corporation and guaranteed by an S corporation shareholder do not increase the shareholder’s basis. The loan must be made directly from the S corporation shareholder to the S corporation in order to increase his or her basis.
Planning Tip—Maintain records of the amount you have at risk in each of your businesses or for-profit activities. This will allow the use of losses and deductions incurred in the activity and avoid unexpected recapture. If your at-risk amount approaches zero, consider ways to increase your basis and weigh that against the economic exposure involved.
Planning for Retirement
48. Monitor Congress for SECURE Act 2.0. The SECURE Act, enacted into law in late 2019, altered the rules around how you can save and withdraw money from your retirement accounts. Currently, an update to this legislation is receiving serious attention from Congress. The House passed the bipartisan SECURE Act 2.0 earlier this year, while in June, two Senate committees advanced different pieces of legislation. A final, updated plan related to retirement could certainly gain approval in 2023 and possibly in 2022. The main items being considered in the legislation include:
Postponing Required Minimum Distributions
Required minimum distributions (RMDs) start at age 72 under current law, but would start at age 73 beginning in 2023 under the proposed law. The legislation would further shift the required start date for distributions to age 74 in 2029 and age 75 in 2032. Other proposals contain variations of that timeline.
Requiring Automatic Enrollment in 40(k) Plans
Under current law, participation in an employer-sponsored 401(k) plan is optional, and an employee must proactively elect to participate in the plan.  Several versions of the proposed legislation contain provisions which would require employers to automatically enroll employees in their 401(k) plans.  If the employee does not wish to participate, he or she may still opt-out, but it would require action on the part of the employee to do so.
Decreasing the Penalty for Failure to Take an RMD
Under current law, failure to comply with RMD requirements results in an excise tax equal to 50 percent of the year’s required distribution amount. New proposals would decrease this penalty to 10 percent or 25 percent.
Allowing Additional Catch-up Contributions for Older Workers
Catch-up contributions currently allow people age 50 and older to set aside additional dollars over the standard maximum contributions to workplace retirement plans. Under new proposals, another form of “catch-up contribution” would be created for those ages 62 to 64 (under one plan) or 60 to 63 (under another plan). Upon achieving this age, individuals would be allowed to add $10,000 to a 401(k) or 403(b) plan (instead of $6,500 under current law).
Restricting Repayment Period for Early Withdrawals for Birth or Adoption Expenses
The 2019 SECURE Act waived the 10 percent penalty for early withdrawals from a workplace savings plan to meet birth or adoption expenses, provided those expenses are repaid to the plan. However, it did not put a timeline on when repayment had to occur. The new proposals would impose a deadline of three years from the date of withdrawal to repay the plan in full to avoid any penalties.
Expanding the Ability to Make Penalty-Free Withdrawals
These proposals provide for penalty-free withdrawals from a workplace savings plan in various additional situations, such as for victims of domestic abuse, terminally ill individuals, individuals affected by a declared disaster and for payment of long term care premiums.
49. Participate in and maximize payments to 401(k) plans, 403(b) plans, SEP (simplified employee pensions) plans, IRAs, etc. These plans enable you to convert a portion of taxable salary or self‑employed earnings into tax-deductible contributions to the plan. In addition to being deductible themselves, these items increase the value of other deductions since they reduce AGI. Deductible contributions to IRAs are generally limited to $6,000 in 2022, while substantially higher amounts can be contributed to 401(k) plans, 403(b) plans and SEPs. For 2022, the deduction for IRA contributions starts being phased out if you are covered by a retirement plan at work and your AGI exceeds $68,000 for single filers and $109,000 for married joint filers. In 2022, $20,500 may be contributed to a 401(k) plan as part of the regular limit of $61,000 that may be contributed to a defined contribution (e.g., money purchase, profit‑sharing) plan. This limit includes both employer and employee contributions. These limits are reflected in the table below. Don’t forget that additional catch-up contributions are allowed for those taxpayers ages 50 and above, as noted in the table.
IRAs can be formed and contributed to as late as April 15, and contributions can be made to an existing IRA on the due date of your return, including extensions. In addition, SEPs can be established and contributed to as late as the due date of your return, including extensions, or as late as October 15, 2023, for tax year 2022.
Planning Tip—Often, teenagers have summer or part-time jobs to earn extra spending money, while learning responsibility and valuable life skills. Retirement is usually the last thing on these teens’ minds. Since these jobs generate compensation, these teenagers are eligible to make either Roth or traditional IRA contributions up to the lesser of $6,000 or 100 percent of their compensation in 2022. A particularly generous parent, grandparent or other family member may wish to contribute to the child’s IRA by gifting the child the contribution, keeping in mind the gift tax, if any. A gift of $6,000 to a Roth IRA now will be worth significantly more, tax-free, when the child retires in 50 years or so.
A 401(k) plan can also be converted into a Roth IRA, but there are potential tax considerations. Please see item 52 for more information.
Observation—Roth 401(k) accounts can be established to take after-tax contributions if the traditional 401(k) plan permits such treatment. Some or all of the traditional 401(k) contributions can be designated by the participant as Roth 401(k) contributions, subject to the maximum contributions that already apply to traditional 401(k) plans (including the catch-up contributions), as reflected in the table below. The Roth 401(k) contributions are not deductible, but distributions from the Roth 401(k) portion of the plan after the participant reaches age 59½ are tax-free.
Annual Retirement Plan Contribution Limits
Type of plan
Traditional and Roth IRAs
Catch-up contributions (ages 50-plus) for traditional and Roth IRAs
Roth and traditional 401(k), 403(b) and 457 plans
Catch-up contributions (ages 50-plus) for 401(k), 403(b) and 457 plans
SIMPLE plans
Catch-up contributions (ages 50-plus) for SIMPLE plans
SEPs and defined contribution plans*
*Annual limits for compensation must be taken into account for each employee in determining contributions or benefits under a qualified retirement plan. For 2022, the limit as adjusted for inflation is $305,000.
Planning Tip—As long as one spouse has $12,000 of earned income in 2022, each spouse can contribute $6,000 to their IRAs. The deductibility of the contributions depends on the AGI reflected on the tax return and on whether the working spouse is a participant in an employer-sponsored retirement plan. Keep in mind that an individual is not considered an active participant in an employer-sponsored plan merely because their spouse is an active participant for any part of the plan year―so it is possible that contributions to the working spouse’s IRA are nondeductible while contributions to the nonworking spouse’s IRA are deductible. In addition, catch‑up IRA contributions, described above, are also permitted.
Potential Legislation Alert—The SECURE Act 2.0, currently pending in Congress, may allow older workers to contribute more to their workplace retirement plans after age 59 or 61 (depending on the final proposal selected). For more information, see item 48 above.
50. Take advantage of changes to retirement contribution rules. With the passage of the original SECURE Act in 2019, there is no longer an age limit for individuals who choose to contribute toward a traditional IRA. Before 2020, those who turned 70½ during the taxable year were ineligible to make any further contributions to their retirement account. Keep in mind that in order to contribute to a traditional IRA, a taxpayer needs to have earned income from a job or self-employment, so this only affects those seniors that are continuing to work after age 70½. The contribution limit for IRAs remains the same at $6,000 ($7,000 for those age 50 and over), and the deductibility of contributions may be limited based on income or your eligibility for an employer plan.
51. Avoid potential penalties for not taking a required minimum distribution. If you were 73 or older during 2022, you must take your RMD for tax year 2022 by December 31, 2022. If you turned 72 during 2022, you have until April 1, 2023, to take your first required minimum distribution. The penalty for not taking an RMD is excessive: 50 percent of the required distribution that is not taken by year-end.
Observation—Certain individuals still employed at age 72 are not required to begin receiving minimum required distributions from qualified retirement plans (401(k), profit sharing, defined benefit plans, 403(b)s, etc.) until after they retire, representing another often overlooked method of deferring tax on retirement savings.
Potential Legislation Alert—As discussed in item 48 above, one of the key features of the pending SECURE Act 2.0 is delaying the start of RMDs until age 73, beginning in 2023. If you are currently age 71 or 72, you may wish to consider monitoring this legislation as its adoption may impact the beginning of your RMD payments.
52. Maximize wealth planning through Roth conversions. Converting a traditional retirement account such as a 401(k) or IRA into a Roth 401(k) or Roth IRA will create taxable income upon conversion and allow tax-free distributions in retirement. There are many good reasons (and a few bad ones) for converting a 401(k) or traditional IRA to a Roth account. Good reasons include:
If you decide to rollover or convert from a 401(k) or traditional IRA to a Roth account and you also expect your AGI and tax bracket to remain more or less constant, you should consider staggering the total amount you plan to shift over a period of years. For example, a taxpayer who plans to convert a total of $185,000 from a regular IRA to a Roth IRA should consider converting $37,000 per year for five years. This strategy may prevent the conversion from pushing a taxpayer into a higher tax bracket, since the conversion is fully taxable on the amount converted.
Keep in mind that a conversion cannot be recharacterized afterward, so careful planning is needed.
Planning Tip—Before transferring assets to a Roth account, carefully analyze which one would provide the greater benefit, and consider the impact of the rollover or conversion on your effective tax rate. This year, many taxpayers have unrealized losses in brokerage accounts that can be harvested to lower their taxable income and reduce the “hit” from a Roth conversion.
In addition, many taxpayers are currently seeing depressed values in their traditional IRA and 401(k) accounts as a result of the down market. One potential way to benefit, in the long run, from a down market without sacrificing market share is by converting a traditional IRA or pre-tax 401(k) to a Roth IRA. While this strategy also comes at a tax cost, as the pre-tax plan must be taxed in the year of the conversion, due to the depressed market, a greater percentage of the savings can be moved into the Roth for a lower tax cost. Then, after the conversion, the Roth account becomes “after tax,” and earnings and contributions are distributed tax-free. We would be happy to assist you in determining the appropriate amount of losses to harvest and corresponding amounts to convert to a Roth.
Planning Tip—Many taxpayers are prevented from making a Roth IRA contribution due to their AGI. For 2022, Roth contributions are prohibited for couples filing jointly whose AGI exceeds $214,000 and for singles and head of household filers whose AGI exceeds $144,000. However, this limitation can be worked around by making a so-called backdoor Roth contribution. A taxpayer can make nondeductible contributions to a traditional IRA and can subsequently convert these contributions into a Roth IRA without being subject to the AGI limitation. Any income earned on the account between the time it was a nondeductible IRA and the time of conversion to a Roth would be required to be picked up as income, though many taxpayers contribute to the traditional IRA and convert to the Roth within a short period of time to avoid this issue.
One potential downside of a backdoor Roth conversion is that the conversion may increase modified AGI for purposes of the net investment income tax, subjecting investment income to a 3.8 percent tax. While the conversion will create taxable income, that income would not be subject to the NIIT; however it could effectively subject other investment income to that tax. Be sure to discuss a possible conversion with us to determine the holistic impact.
53. Make charitable contributions directly from 2022 IRA distributions. Current law provides an exclusion from gross income for certain distributions of up to $100,000 per year from a traditional IRA when contributed directly to a qualified tax-exempt organization to which deductible contributions can be made. For married couples, each spouse can make a $100,000 distribution from their respective retirement account for a potential total of $200,000. This special treatment applies only to distributions made on or after the date the IRA owner reaches age 70½, and the distribution must be made directly from the IRA trustee to the charitable organization. Distributions that are excluded from income under this provision are not allowed as a deduction. Qualified charitable distributions (QCDs), as these are called, may be especially beneficial for those charitably minded taxpayers who claim the standard deduction or whose taxable Social Security benefits are affected by AGI thresholds.
Observation—By excluding the IRA distributions from income, QCDs also result in a lower AGI, which may make income or deductions affected by AGI (such as medical deductions) more valuable and may also eliminate or reduce the amount of Social Security benefits that are subject to tax. Additionally, by excluding income with a QCD, you may also expand your eligibility for certain deductions and credits that might be otherwise phased out due to higher income.
Planning Tip—Qualifying charitable distributions can be used to satisfy RMD requirements, thus allowing taxpayers to exclude income they would otherwise be required to include. It is also important to note that while the SECURE Act changed the age for the initial RMD to 72, the minimum age to make a QCD remains 70½. As a practical matter, however, such charitable distributions may not be made to a private foundation or donor-advised fund.
54. Plan to stretch. The SECURE Act partially eliminated the “stretch IRA” strategy, whereby IRA owners would utilize their retirement accounts as a means to transfer wealth to the next generation. For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy. This strategy is particularly beneficial for taxpayers with Roth IRAs, as beneficiaries do not have to pay taxes on withdrawals from the Roth.
For deaths of plan participants or IRA owners beginning in 2020, distributions to most nonspousal beneficiaries are generally required to be distributed within 10 years following the plan participant or IRA owner’s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed.
Planning Tip—In order to avoid the 10-year rule, distributions must be made to either:
Distributions to any beneficiaries who qualify under any of these exceptions may generally take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020). Whether one is in the process of naming beneficiaries for their IRA or receiving payments from an inherited IRA, a knowledgeable tax adviser can assist in ensuring the required distributions are taken while minimizing the tax due in light of other, non-tax concerns, such as need for cash flow.
Observation—Earlier this year, the IRS issued proposed regulations for inherited IRAs where the decedent was already receiving required minimum distributions. Under these proposed regulations, if the decedent was already receiving RMDs at the time of his or her death, the beneficiary must continue to take RMDs, based on their remaining life expectancy, in years one through nine following the date of death. Prior to these proposed regulations, distributions in years one through nine were allowed, but not required. Under both scenarios, the inherited IRA must be fully distributed within 10 years of the decedent’s death.
Planning for Higher Education Costs
Many tax-saving opportunities exist for education-related expenses. If you or members of your family are incurring these types of expenses now or will be in the near future, it is worth examining them. Here are some strategies to consider as year-end approaches.
55. Retain control and plan ahead for tax-free growth with 529 qualified tuition plans. Section 529 plans have both favorable tax and nontax aspects for educational planning. The most important nontax aspect is that the ownership and control of the plan lies with the donor (typically the parent or grandparent of the beneficiary student) and not with the beneficiary. Having donor control and ownership means the plan is not considered an asset of the student for financial aid purposes, generally resulting in higher financial aid.
For federal income tax purposes, plan contributions are on an after-tax basis, although many states allow a deduction. Contributions and earnings on contributions that are subsequently distributed for qualified higher education expenses (including tuition, room and board, and other expenses) at accredited schools anywhere in the United States are free of federal income tax and may be free of state income tax. Since 2018, 529 plan owners can use tax-free distributions for up to $10,000 of eligible expenses at elementary and secondary schools, in addition to colleges and universities. Since the SECURE Act was passed in December 2019, tax-free distributions can now be used to pay for eligible expenses related to an apprenticeship program, in addition to higher education expenses. The SECURE Act also allows up to $10,000 of distributions to pay principal or interest on a qualified education loan of the beneficiary or a sibling of the beneficiary.
To the extent that distributions are not for qualified higher education expenses, regular income tax plus a 10 percent penalty may apply to the earnings portion of the distribution. As contrasted with the other education strategies discussed below, contributions may be made regardless of the donor’s AGI.
An election can also be made to treat a contribution to a 529 plan as having been made over a five-year period; consequently, for 2022, a married couple can make a $160,000 ($170,000 beginning in 2023) contribution to a 529 plan without incurring any gift tax liability or utilizing any of their unified credit, since the annual gift exclusion for 2022 is $16,000 (increasing to $17,000 for 2023) per donor and the contribution can be split with the donor’s spouse. It is important to note that additional gifts made in the five-year period to the same recipients have a high chance of triggering a gift tax filing obligation.
Planning Tip—If your resident state allows a deduction, make a contribution to a 529 plan and immediately take a qualified distribution to pay for college tuition. In effect, this will provide you with a discount on college costs at your marginal state income tax rate.
Observation—Currently, more than 30 states and the District of Columbia allow a deduction for Section 529 plan contributions. Please make sure you have the appropriate 529 plan, as many states are particular about what type of plan can lead to a state deduction. For example, New York only allows deductions for 529 plans set up under New York law. If you have changed residency since setting up a 529 plan, review your options before contributing.
Finally, in general, to the extent that contributions to a 529 plan are not distributed for the benefit of the beneficiary, the account may be transferred to a member of the beneficiary’s family, penalty-free. As long as the amounts transferred are used for qualified education expenses, they will still be free from federal income tax, as noted above. However, any change in beneficiary may be subject to the federal gift tax, so proper planning considerations should still be reviewed.
Planning Tip—Currently, students are required to report distributions from a grandparent-owned 529 plan on their Free Application for Federal Student Aid (FAFSA), with 50 percent of the gift being counted as available funds for college, thus reducing the amount they receive in financial aid. Looking forward, for the 2024-25 school year, students will no longer be required to report distributions from grandparent-owned 529 plans on their FAFSA forms. If planning to give to a grandchild in the future, it can be favorable to set up and contribute to a 529 plan for your grandchild now.
Observation—It is important to plan for 529 plan distributions in coordination with the education credits discussed next. An individual's qualifying higher educational expenses (for determining the taxable portion of 529 plan distributions) must be reduced by tax-free education benefits (such as scholarships and employer-provided education assistance) plus the amount of the qualifying expenses taken into account in computing an education credit (whether allowed to the taxpayer or another tax-paying individual). To avoid any income recognition, it is important to talk to your tax adviser and perform a comprehensive review before any 529 plan distributions.
56. Take advantage of education credit options. If you pay college or vocational school tuition and fees for yourself, your spouse and/or your children, you may qualify for either the American opportunity tax credit or the lifetime learning credit to offset the cost of education. These credits reduce taxes dollar-for-dollar, but begin to phase out when 2022 modified AGI exceeds certain levels. The chart below provides a summary of the phaseouts.
2022 Education Expense and Credit Summary
Tax benefit
Single filers (not including married filing separately)
Joint filers
Maximum credit/deduction/contribution
American opportunity tax credit
$80,000 – $90,000
$160,000 – $180,000
$2,500 (credit)
Lifetime learning credit
$80,000 – $90,000
$160,000 – $180,000
$2,000 (credit)
Student loan interest deduction
$70,000 – $85,000
$145,000 – $175,000
$2,500 (deduction)
Coverdell education savings account
$95,000 – $110,000
$190,000 – $220,000
$2,000 (contribution)
Planning Tip—The credits are allowed for tuition paid during the year for education received that year or during the first three months of the next year. Consequently, consider paying part of 2023 spring tuition at the end of 2022 if you have not maximized the credit or reached the above income thresholds.
Planning Tip—Parents can shift an education credit from their tax return to the student’s tax return by electing to forgo the child tax credit for the student and not claiming the child as a dependent. This strategy is a common move for high-income parents whose income prevents them from claiming the education credit or from receiving any benefit from the child tax credit. To benefit from this strategy, however, the student must have sufficient income―and therefore tax liability―to take advantage of the credit. Credits are allowed on a student’s tax return even if parents are the ones who pay for the qualified education expenses. It might be necessary to shift income to the student as well, perhaps through gifts of appreciated property (that the student then sells at a gain) or employment in a family business, as discussed in item 95. However, be careful about the impact on a student’s financial aid―shifting income to a student can reduce financial aid amounts and eligibility.
Planning Tip—Advanced high school students and high school students taking college-level classes (including dual credit classes) may be eligible for an education credit. For the American opportunity tax credit, the student must be enrolled at least half time in a post-secondary degree program. For the lifetime learning credit, the student must also be enrolled in one or more courses that are part of a degree program, but there is no course workload requirement. Therefore, it may be easier for the student to qualify for the lifetime learning credit. In any case, the course(s) must count toward a degree to qualify. Perhaps the best way to determine this is to simply ask the educational institution. Preferably, the institution’s answer should be in writing and saved with your tax materials.
57. Remit additional student loan payments. The CARES Act initially gave temporary payment relief to borrowers of certain qualifying federal student loans. This pause has now received multiple extensions and, most recently, the Biden administration announced a final extension through June 30, 2023, or 60 days after the student loan forgiveness litigation is resolved, whichever is later. If your federal loans qualified, the U.S. Department of Education has automatically placed your loans in “administrative forbearance”. During this time, you are not required to make any payments and your applicable interest rate was adjusted to zero percent. You should consider making a payment prior to the end of the forbearance period, which will go directly toward your principal and may help pay down your loan faster.
If your loan did not qualify for administrative forbearance or if you paid interest in 2022 on a qualifying federal student loan, an “above the line” deduction of up to $2,500 is allowed for interest due and paid in 2022. Note that the deduction is not allowed for taxpayers electing the filing status of married filing separate. Additionally, a taxpayer who can be claimed as a dependent on another's return cannot take the deduction. The deduction is phased out when AGI exceeds certain levels. See chart above.
Planning Tip—It is important to take into consideration any interest payments by your employer that were excluded from income as discussed in item 112 below. These payments cannot count as student loan interest deductions, as this would result in a double tax benefit.
58. Fund contributions to a Coverdell education savings account. Coverdell education savings accounts (ESAs) must be established in a tax-exempt trust or custodial account organized exclusively in the United States. At the time the trust or account is established, the designated beneficiary must be under 18 (or a special needs beneficiary) and all contributions must be made in cash and are not tax-deductible. The maximum total annual contribution is limited to $2,000 per beneficiary per year, and the contribution is phased out when AGI exceeds certain levels. Distributions from Coverdell ESAs are excludable from gross income to the extent that the distributions do not exceed the qualified education expenses incurred by the designated beneficiary, less any amounts covered by grants or scholarships and credits received from lifetime learning or American opportunity tax credits, as discussed at item 56 above. Tax-free withdrawals can be paid for qualified expenses, which also include kindergarten through grade 12 and higher education expenses. If distributions exceed qualified expenses, a portion of the distributions is taxable income to the designated beneficiary. Furthermore, to the extent that distributions are not used for educational expenses, a 10 percent penalty applies.
Planning Tip—Since Coverdell ESAs provide the same tax benefit as a 529 plan, you may wish to consider converting the Coverdell to a 529 and take a state tax deduction, if available in your state.
Observation—Many taxpayers do not understand the differences between a Coverdell ESA and a 529 plan. Differences range from who sponsors the plan, income restrictions for contributions, investment flexibility, and when and how funds must be used. If you are deciding between the two, please reach out to your tax adviser for guidance.
59. Consider education benefits from financial aid and loan discharges. In August, the Biden-Harris administration announced their three-part plan to aid federal student loan borrowers in transitioning back to regular payments as the pandemic-related relief begins to expire. One facet of the plan was to provide loan forgiveness of up to $20,000 for Pell Grant recipients and up to $10,000 for non-Pell Grant recipients. The Department of Education began accepting applications in October 2022, amassing over 20 million applicants in just the first few days. In order to be eligible for the debt cancellation, borrowers must have federally held student loans, meet certain dependency rules and have individual income less than $125,000 or $250,000 for married filed jointly on their 2020 or 2021 tax returns. If a borrower is deemed to be a dependent student under the Department of Education’s FAFSA framework, then the parents’ income will be used to determine the eligibility for relief.
While the Department of Education has currently stopped accepting applications, litigation is ongoing, with a U.S. Supreme Court decision expected in June 2023. In the meantime, the Department of Education has recently forgiven loans of hundreds of thousands of borrowers who were defrauded by certain colleges under a separate forgiveness program.
Observation—The Internal Revenue Code is rarely this kind when it comes to the taxation of debt forgiveness. If the program reopens and you or a loved one qualifies for debt forgiveness, we encourage you to submit your application promptly. The process is not time-consuming and there is minimal information requested with the initial application. You can sign up for updates on the Department of Education’s website.
Strategies for Saving
60. Help a disabled loved one maintain a healthy, independent and quality lifestyle with an achieving a better life (ABLE) account. An ABLE account is a tax-advantaged savings vehicle that can be established for a designated beneficiary who is disabled or blind. Only one account is allowed per beneficiary, though any person may contribute. Contributions to an ABLE account are not deductible on the federal tax return, but some states allow a deduction for contributions to the plan. Earnings in the account grow on a tax-deferred basis and may be distributed tax-free if used for qualified disability expenses, including basic living expenses such as housing, transportation and education, as well as medical necessities. If distributions are used for nonqualified expenses, those are subject to income tax plus a 10 percent penalty tax.
Total annual contributions by all persons to the ABLE account cannot exceed the gift tax exclusion amount ($16,000 for 2022, $17,000 for 2023), though additional annual contributions may be possible if the beneficiary is employed or self-employed. An allowed rollover from the 529 college savings account to the ABLE account is considered a contribution and counts toward the maximum allowed annual limit. States have also set limits for allowable ABLE account savings. If you are considering an ABLE account, contact us for further information.
Observation—We understand that people sometimes fear giving because they do not want a disabled individual to lose a benefit they are currently entitled to receive. While ABLE accounts have no impact on an individual's Medicaid eligibility, balances in excess of $100,000 are counted toward the Supplemental Security Income (SSI) program's $2,000 individual resource limit. Thus, an individual's SSI benefits are suspended, but not terminated, when their ABLE account balance exceeds $102,000 (assuming the individual has no other assets). In addition, distributions from an ABLE account used for housing or nonqualified expenses may affect SSI benefits if the money is not spent within the same month the withdrawal is made. It is important to keep these potential nontax ramifications in mind before making a contribution.
61. Achieve tax savings via health and dependent care flexible spending accounts (IRC Section 125 accounts). These plans enable employees to set aside funds on a pretax basis for (1) medical expenses that are not covered by insurance up to $2,850 per year ($3,050 in 2023); (2) dependent‑care costs up to $5,000 per year; and (3) adoption assistance of up to $14,890 per year. Funds contributed by employees are free of federal income tax (at a maximum rate of 37 percent), Social Security and Medicare taxes (at 7.65 percent) and most state income taxes (at maximum rates as high as 13.3 percent), resulting in a tax savings of as much as 57.95 percent. Paying for these expenses with after‑tax dollars, even if they meet various AGI requirements, is more costly under the current tax rate structure. Since many restrictions apply, such as the “use it or lose it” rule, review this arrangement before making the election to participate.
Please note that the 2022 dependent care benefit contribution limit has reverted to $5,000, after being $10,500 for 2021.
Illustration—The tax savings resulting from participation in flexible spending accounts (FSA) are often significant. Assume a married couple maximizes the contribution for uncovered medical costs ($2,850 from each FSA, totaling $5,700) and also contributes $5,000 for qualified day care expenses. Assuming a 37 percent tax rate, the family creates a tax savings of about $4,778―$3,959 in income taxes and $819 in Social Security/Medicare taxes, not counting any potential reductions in state income taxes.
Planning Tip—Section 125 plans often adopt a two-and-a-half month grace period (to March 15, 2023) during which employees who participate in the plan can use up any unspent funds on new qualified expenses incurred in early 2023 during the grace period. Accordingly, this can potentially reduce employee contributions that would otherwise be subject to forfeiture. You should check with your employer’s benefits department to determine if your employer has adopted any such extension provisions, as plans are not required to offer a grace period.
Planning Tip—Married couples who both have access to FSAs will also need to decide whose FSA to use. If one spouse’s salary is likely to be higher than the Federal Insurance Contributions Act (FICA) wage limit ($147,000 for 2022) and the other spouse’s salary will be less, the one with the smaller salary should fund as much of the couple’s FSA needs as possible. This is because FSA contributions by the spouse whose income is higher than the FICA wage limit will not reduce the 6.2 percent Social Security tax portion of the FICA tax, but FSA contributions by the other spouse will reduce it. This planning tip also applies to health savings accounts mentioned below.
For example, if John’s salary is $170,000 and Mary’s salary is $50,000, FSA contributions of $5,000 by John will not reduce his Social Security tax (since, even reflecting the FSA contributions, his Social Security wages exceed $147,000), while FSA contributions of $5,000 by Mary will save her approximately $300 in Social Security tax.
62. Reach your retirement goals with a health savings account (IRC Section 223 account). Health savings accounts (HSAs) are another pretax medical savings vehicle that are currently highly favored in the marketplace. Taxpayers are allowed to claim a tax deduction for contributions to an HSA even if they are not able to itemize medical deductions on Schedule A. HSAs can also work alongside with your 401(k) or IRAs to accomplish your retirement goals. Some key HSA elements include: (1) HSA contributions are deductible, subject to annual limits; (2) employer contributions to your HSA are not treated or taxed as income to you; (3) interest or other earnings on your HSA account accrue tax-free, provided there are no excess contributions; and (4) HSA distributions are tax-free if spent on qualified medical expenses.
To be eligible for an HSA, you must be covered by a high deductible health plan (HDHP). You must also meet the following requirements: (1) you must have no other health coverage besides the HDHP; (2) you must not be enrolled in Medicare; and (3) you cannot be claimed as a dependent on someone else’s income tax return in the current tax year. For self-only coverage, the 2022 limit on deductible contributions is $3,650. For family coverage, the 2022 limit on deductible contributions is $7,300. A "catch-up" contribution will increase each of these limits by $1,000 if the HSA owner is 55 or older at the end of the year.
Planning Tip—Careful consideration must be given to HSAs when becoming eligible for and enrolling in Medicare. An individual ceases to be an "eligible individual" starting with the month she or he is entitled to benefits under Medicare. However, mere eligibility for Medicare doesn't disqualify an individual from contributing to an HSA. An otherwise eligible individual who isn't actually enrolled in Medicare Part A or Part B may contribute to an HSA until the month that individual becomes enrolled in Medicare.
Most taxpayers know that once they are enrolled in Medicare, they cannot contribute to an HSA; however, many taxpayers who work past age 65 and have an HSA still can be surprised by something known as “retroactive Medicare.” If an individual files a Medicare application more than six months after turning age 65, Medicare Part A coverage will be retroactive for six months. Individuals who delayed applying for Medicare, but were later covered by Medicare retroactively to the month they turned 65 (or retroactively for six months), cannot make contributions to the HSA for the period of retroactive coverage. The retroactive enrollment made the taxpayer ineligible to contribute to an HSA for that period. The result is almost always excess contributions that need to be removed as soon as possible, with your employer needing to be alerted to the retroactive coverage. If you have an HSA that you still contribute to and you are considering applying for Medicare, please consult with your tax adviser first.
Planning Tip—The HSA is not a “use it or lose it” account like an FSA, which means wiser choices can be made in long-term healthcare spending. Funds remaining in an HSA at year-end are not forfeited, but remain in the account tax-free until distributed for medical purposes. Like IRAs, an individual owns their HSA, even after a job change, making the HSA a very portable savings device.
Planning Tip—Just as with IRAs (see item 49), HSA contributions can be gifted by another member of the family. If you want to help your child, grandchild or other relative that has just started working and is covered under a high deductible health plan with an HSA, you can make the annual contribution on their behalf to their HSA. This allows your child or grandchild to take the deduction on their tax return while also funding an HSA that will hopefully grow and help them with any medical situations during their lives. Please note that this contribution needs to be taken into account when determining your annual gifting limits ($16,000 for 2022).
Planning Tip—You should be especially mindful of the annual contribution limit for HSAs when you switch jobs mid-year. The annual contribution limit ($3,650 for individual coverage and $7,300 for family coverage for year 2022) is a combination of employee contribution and all employer contributions in a calendar year. Multiple employers may be generous enough to contribute to your HSA account, resulting in excess contribution after factoring in your own contribution. Excess contributions not only are not deductible, but also subject to ordinary income tax and an additional 6 percent excise tax. The excise tax applies to each year the excess contributions remain in your HSA account―so if you have excess contributions, be sure to withdraw them and any earnings attributable to the excess contributions by the due date of your next tax return.
63. Consider tax payments by credit or debit card. The IRS accepts tax payments by credit and debit cards, both online and over the phone. Some taxpayers may choose to make tax payments with a credit card, which could potentially earn rewards like frequent flyer miles, cash‑back bonuses, reward points or other perks. The IRS now allows a taxpayer to select their preferred payment processor from either payUSAtax, Pay1040 or ACI Payments Inc., whose credit card fees ranged from 1.87 percent to 1.98 percent for tax year 2022. Additionally, they offer flat rates for most debit cards, which range from $2.20 to $2.55. If you are hoping to take advantage of your credit card’s rewards, you must consider the potential fees that come along with your balance due. For example, a $20,000 balance due payment will incur a fee of approximately $400, which is considered a nondeductible personal expense. It might be worth it for some to use their debit card instead, receiving a lower fee of roughly $2.50, but missing out on potential rewards from their credit card.
64. Consider accelerating life insurance benefits. Selling all or even a small portion of your life insurance policy allows the policyholder to receive funds in advance while they are still living. This practice is more prevalent with individuals who are chronically or terminally ill, using the funds to help cover medical bills and the cost of treatment. Additionally, those who are chronically or terminally ill and choose to accelerate their life insurance benefits may exclude these payments from income, subject to certain requirements. When you sell part of your life insurance policy, you are still responsible for making premium payments. An alternative to this is to sell your entire life insurance policy to a viatical settlement provider, who regularly engages in the business of purchasing or taking assignments of such policies. Payments received from the viatical settlement provider may also be excluded from income.
65. Manage your nanny tax. If you employ household workers, it might be best to try to keep your total payments to each of your household workers under $2,400. If you pay $2,400 or more to a worker, you are required to withhold Social Security and Medicare taxes from them and pay those withholdings, along with matching employer payroll taxes, on your individual income tax return on Schedule H, household employment taxes. You are not required to withhold Social Security and Medicare taxes from household employees who are your spouse, your child (if they are under age 21), your parent (exceptions apply) and an employee under age 18 (unless the household work is their principal occupation). Additionally, you may have to pay Federal Unemployment Tax if you paid more than $1,000 in total to your household workers in any calendar quarter. You also may be required to file quarterly wage reports with your state department of labor to comply with state unemployment insurance requirements.
66. Consider deferring loan modifications and debt cancellations until 2023. Deferring the cancellation of your debt until 2023 could reduce your taxable income for 2022. While most debt forgiveness and cancellations will be recognized as taxable income, there are some exceptions. Your cancellation of indebtedness (COD) income may be eligible for an exclusion if it involves insolvency, bankruptcy, student loans and some other situations. In some scenarios, even when cancellation of debt is excluded from income, other tax attributes may be affected. For example, basis must generally be reduced, so the COD income exclusion is more of a deferral of the income rather than an absolute exclusion, as the cancellation will have lasting effects that will need to be tracked for years after the debt was cancelled. Further, it can often be difficult and expensive to determine whether a taxpayer is insolvent, which involves appraisals of assets and liabilities to determine their fair market value on a certain date.
Observation—There is also a gross income exclusion for the cancellation of qualified principal residence indebtedness. This exclusion was extended through the end of 2025 by the Congressional Appropriations Act of 2021. Unless it gets extended again, any mortgage debt on a principal residence that is cancelled after December 31, 2025, will not qualify for the exclusion. While the Congressional Appropriations Act of 2021 extended the exclusion’s reach, it also reduced the amount of debt that can be excluded from income from $1 million to $375,000 for single filers and from $2 million to $750,000 for married filers.
67. Beware of alternative minimum tax (AMT). For individuals, AMT remains less threatening than it has been in the past. The AMT predominantly applies to high-income individuals, disallowing certain deductions, while also including certain exempt income in taxable income. In 2022, the exemption amount for single individuals is $75,900 and $118,100 for joint filers. For tax year 2022, the AMT tax rate of 28 percent applies to excess alternative minimum taxable income of $206,100 for all taxpayers ($103,050 for married couples filing separately).
Planning Tip—Many of the adjustments or preferential items that have been part of the alternative minimum taxable income calculation were eliminated with the passing of the TCJA in 2017. Even though the AMT exemption was dramatically increased in 2018, it is still important to plan for the AMT. This change had a significant impact on taxpayers living in states with high income taxes, as the deduction for state and local taxes was not allowed in the AMT computation. The combination of the increased AMT exemption, the $10,000 limitation on the state and local tax deduction and the elimination of miscellaneous itemized deductions resulted in fewer taxpayers being subject to AMT. However, it is important to note that if the state and local tax deduction limitation is increased, which Congress has recently considered, more taxpayers may be impacted, though still not as many as in prior years due to the greatly increased exemption.
It may be beneficial to accelerate income, including short-term capital gains, into a year you are subject to AMT, as it could reduce your maximum marginal rate. The opposite could hold true as well—it may be beneficial to defer income as you could be subject to a lower AMT in a following year. You also may want to consider exercising at least a portion of incentive stock options (ISOs) since the favorable regular tax treatment for ISOs has not changed for 2022. However, careful tax planning may be needed for large ISO lots, as exercising them could still subject you to the AMT. If you would not be subject to the AMT in 2022, follow the guiding philosophy of postponing income until 2023 and accelerating deductions (especially charitable contributions) into 2022.
68. Take advantage of extended energy credits. Several tax credits for purchasing or installing energy efficient improvements for qualified residential properties were scheduled to expire after 2021 but have been extended and renamed as part of the Inflation Reduction Act of 2022. The applicable credits that have been extended are shown below:
Maximum credit
Energy-efficient home improvements and qualified residential energy property (2022)
Energy Efficient Home Improvement Credit (2023 – 2032)
Dec. 31, 2032
$500 (for 2022)
$1,200 (for 2023-2032)
Residential energy efficient property (2022)
Residential Clean Energy Credit (2023)
Dec. 31, 2034
30% for 2022-2032, 26% for 2033, 22% for 2034
Qualified fuel cell motor vehicle
Dec. 31, 2032
$4,000 to $40,000
Alternative fuel vehicle refueling equipment credit
Dec. 31, 2032
$30,000 (for business)
30% of the costs, up to $1,000 (for nondepreciable property)
69. Retroactively pay withholding via a retirement rollover. Once a year, the IRS allows taxpayers to take money out of an IRA tax-free, as long as it is rolled over to another IRA within 60 days. Some savvy individuals even use this provision to take out a short-term, tax-free loan. The one-year waiting period begins on the date you receive the IRA distribution, not on the date you roll the distribution back into the same or another IRA. These IRA withdrawals are able to have (and in some cases require) federal and/or state taxes withheld. Since withholding can be treated as evenly distributed throughout the year, it is possible to make up for missed estimated payments from earlier in the year.
For example, if you determine in the fourth quarter of 2022 that you missed the previous three quarterly federal estimated payments totaling $60,000, you could take out an IRA distribution for $100,000 with 80 percent or $80,000 withheld. The $80,000 would be remitted to the IRS and, within 60 days of the $100,000 distribution, you would pay back the entire $100,000 amount. The $80,000 of federal withholding would be applied evenly throughout 2022, resulting in $20,000 payments for each of the previous three quarters and therefore void the calculated $60,000 underpayment.
Observation—Careful attention must be given to dates of distribution and when the amounts are repaid. Please consult your tax adviser to determine if a prior quarter underpayment exists, determine how much should be withheld and to set up a timeline for the distribution and repayment. It is also important to consider that your assets will be withdrawn from your account until you pay it back within 60 days. The longer you wait to pay back the IRA, the greater the risk of missing potential market gains.
70. Withdraw retirement funds penalty-free for new parents who need it. Generally, a distribution from a retirement plan must be included in taxable income. Unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59½ is also subject to a 10 percent early withdrawal penalty on the amount includible in income. The SECURE Act created an exception to the 10 percent penalty for new parents. Now plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.
Planning Tip—While the penalty for early distributions is waived in this scenario, this distribution will still be considered taxable income. You have up to one year post birth or adoption to make the distribution, so depending on your overall tax planning it might be beneficial for one spouse to take their $5,000 distribution in the first calendar year and the other spouse to take the distribution in the next calendar year, but before the one-year period ends. Please consult your tax adviser for the full tax consequences of this penalty-free distribution.
71. Plan for the net investment income tax and Medicare surtax. High-income taxpayers face two special taxes—a 3.8 percent NIIT and a 0.9 percent additional Medicare tax on wage and self-employment income.
Net Investment Income Tax
The 3.8 percent NIIT tax applies, in addition to income tax, to your net investment income. The tax only affects taxpayers whose adjusted gross income exceeds $250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for married individuals filing separately. These threshold amounts are not indexed for inflation. Thus, over time, inflation will cause more taxpayers to become subject to the 3.8 percent tax. Net investment income that is subject to the 3.8 percent tax consists of:
Income from an active trade or business is not included in net investment income, and neither is wage income. However, passive business income is subject to the NIIT. So, while rents from an active trade or business are not subject to the tax, rents from a passive activity are. Income from a business of trading financial instruments or commodities is also included in net investment income.
Planning Tip—NIIT only applies if you have income in excess of the applicable threshold and you have income categorized as net investment income. Consider and discuss the following strategies with your tax adviser to help minimize net investment income:
Medicare Surtax
Some high-wage earners pay an extra 0.9 percent Medicare tax on a portion of their Medicare wages in addition to the 1.45 percent Medicare tax that all wage earners pay. The 0.9 percent Medicare tax applies to wages in excess of $250,000 for joint filers, $125,000 for married individuals filing separately and $200,000 for all others.
An extra 0.9 percent Medicare tax also applies to individuals with self-employment income. This 0.9 percent tax is in addition to the regular 2.9 percent Medicare tax on all self-employment income. The $250,000, $125,000 and $200,000 thresholds are reduced by the taxpayer's wage income. While self-employed individuals can claim half of their self-employment tax as an income tax deduction, the extra 0.9 percent tax is not deductible. A self-employment loss is not considered for purposes of the 0.9 percent Medicare tax.
Planning Tip—While employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income, 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. If you have changed employers or changed your employment status from an employee to a self-employed individual or the reverse (self-employed to employee), watch for the possible additional 0.9 percent Medicare surtax.
Special Considerations for Corporate Executives (Items 72 to 78)
72. Consider selling the stock you received from incentive stock options (ISOs), aka statutory options. If you receive ISOs, you are entitled to special treatment for regular tax purposes. This includes: no taxation at the time the ISO is granted or exercised; deferral of tax on the benefit associated with the ISO until the stock is sold; and taxation of the entire profit on the sale of stock acquired through ISO exercise. The ISO is taxed at the lower long-term capital gain rates as long as you hold it for more than two years from date of grant and one year from date of exercise. Employment taxes do not apply on the exercise of an ISO. Be aware that the exercise of an ISO may produce AMT tax, as discussed below.
Planning Tip—If the stock you received has a low basis as compared to the potential selling price, it may be time to sell to offset losses you may have incurred in the market. By offsetting other losses, you may be able to sell this stock with minimal tax consequences.
Observation—This special treatment is not allowed for AMT purposes. Under the AMT rules, you must include income from the year the ISO becomes freely transferable or is not subject to a substantial risk of forfeiture and the bargain purchase price, which is the difference between the ISO’s value and the lower price you paid for it. For most taxpayers, this occurs in the year the ISO is exercised. Consequently, even though you are not taxed for regular tax purposes, you may still have to pay AMT on the bargain purchase price when you exercise the ISO, even though you did not sell the stock and even if the stock price declines significantly after you exercise. Under these circumstances, the tax benefits of your ISO will clearly be diminished. With the passage of the TCJA, the impact of the AMT has been diminished, though careful analysis of the tax environment and AMT exposure through the exercise of ISOs is necessary for maximum tax savings.
Planning Tip—Retirees generally have 90 days after retirement to exercise the options that qualify as ISOs. If you have recently retired or are approaching retirement, evaluate whether the exercise of remaining ISOs will be beneficial.
Also, if 2022 is a down year in terms of income and/or you are worried about future tax increases and wish to lessen the risk for both ordinary income tax rates and capital gains tax rates, consider exercising stock options this year. You will recognize income on many types of options, including nonqualified stock options and incentive options, at the time exercised. Exercising the options before year-end would trigger the income for 2022. Keep in mind, however, that such exercise will also accelerate the deduction for the employer when they may be seeking to defer deductions in anticipation of a rate increase.
Statutory Stock Option (ISO)
Regular tax
Grant date
Not taxable.
Not taxable.
At exercise date
Not taxable.
Increases AMT income by FMV of option less exercise price.
Date of sale (holding period met)
• Income subject to capital gains rates. • Basis equals exercise price.
Decreases AMT income by the positive AMT adjustment required at exercise date.
Date of sale (holding period not met)
• Gain on sale: FMV of the options less the exercise price is treated as taxable W-2 wages; excess gain is capital gain. • Loss on sale: The loss is a capital loss.
• Negative AMT adjustment equal to the positive AMT adjustment required at exercise date. • No adjustment required if stock is exercised and sold in the same year.
Statutory Stock Option (ESPP)
Regular tax
Grant date
Not taxable.
Not taxable.
At exercise date
Not taxable.
Not taxable.
Date of sale (holding period met)
Compensation income if FMV of stock is greater than exercise price.
Same as regular tax.
Date of sale (holding period not met)
• The FMV (at exercise date) of the option minus the exercise price is treated as taxable W-2 wages. • Basis in the stock is increased by the amount included in compensation. Difference between increased basis and the selling price is a capital gain or loss.
Same as regular tax.
Nonstatutory Stock Option
Regular tax
Grant date
Not taxable unless FMV is readily determined.
At exercise date
• Substantially vested stock: FMV of option minus the exercise price is treated as taxable W-2 wages. • Restricted stock: Defer recognition until substantially vested.
Date of sale (holding period met or not met)
• The holding period requirement is not applicable to nonstatutory stock options. • Income is subject to short-term or long-term capital gain or loss treatment. • Basis equals the amount treated as taxable wages plus exercise price. • Typically exercise and sale occur on the same day.
73. Take advantage of deferred compensation contributions to maximize the benefits of deferring income. Annual limits for compensation must be taken into account for each employee in determining contributions or benefits under a qualified retirement plan. For 2022, the limit as adjusted for inflation is $305,000. This means that for an executive earning $350,000 a year, deductible contributions to, for instance, a 15 percent profit-sharing plan are limited to 15 percent of $305,000, or $45,750. Nevertheless, there is a way to avoid this limitation that you might want to consider.
It is possible to increase the benefits by using plans that are not subject to qualified plan limitations through nonqualified deferred compensation (NQDC) agreements. These plans have no mandatory contribution limits and it is at the employer’s discretion who participates. These deferred compensation agreements are contracts between an employer and an employee for the payment of compensation in the future—at retirement, on the occurrence of a specific event (such as a corporate takeover) or after a specified number of years―in consideration of the employee’s continued employment with the employer.
Unlike a qualified plan, an NQDC is funded at the discretion of the employer and is subject to the claims of creditors. There are no guarantees that the benefits will be available to the employee in the future. Essentially, the trust is under the employer’s control and, structured properly, will result in a deferral of income taxes for the employee on the amount of compensation deferred above the traditional limitations. Distributions will be taxed at ordinary income rates and may be subject to Social Security and Medicare withholding.
74. Consider filing an IRC Section 83(b) election with regard to year-end restricted stock grants to preserve potential capital gain treatment, but be careful. If you make the election within 30 days of the grant, you will pay tax at ordinary income rates on the spread between the market price (the value of the stock) and the grant price (the amount you paid). The benefit, however, is that you defer taxation on the future appreciation in the value of the restricted stock until it is sold and the postelection increase in value is taxed at the lower capital gain rates, rather than the higher ordinary income rates. The risk with making the election, however, is that the stock price might decline by the vesting date and you will have then prepaid income tax on an unrealized gain. If you eventually sell the stock at a loss, you will be subject to the net capital loss limitation of $3,000. The rules governing restricted stock awards are technically complex and call for careful tax planning strategies.
75. Consider filing an IRC Section 83(i) election with regard to qualified equity grants. Qualified employees at private companies who are granted nonqualified stock options or restricted stock units may elect to defer the income from qualified stock transferred to the employee by the employer for up to five years. This election is an alternative to being taxed in the year in which the property vests under IRC Section 83(a) or in the year in which it is received under Section 83(b). The election to defer income inclusion for qualified stock must be made no later than 30 days after the first date that the employee’s right to the stock is substantially vested or is transferable, whichever occurs earlier.
Caution: If the fair market value of the stock decreases within the deferral period, the fair market value on the date the stock is received still must be included in the employee's income. This creates the risk of the employee paying income tax on an amount that is never received.
If a qualified employee elects to defer income inclusion, the employee must include the income at the earliest of the following dates:
76. Opt for a lump-sum distribution of employer stock from a retirement plan. By receiving a lump-sum of employer stock, you can achieve large tax savings. Employer stock in a lump-sum distribution from a qualified plan is taxed based on the plan’s basis in the stock rather than on its value, unless a taxpayer elects otherwise. Consequently, assuming value exceeds cost, the tax on the unrealized appreciation is deferred until a later date when the stock is sold. This could be many years after receipt. As an added benefit, when the stock is sold at a later date, the gain is subject to tax at the more favorable long-term capital gains rate. Any additional appreciation that accumulates after the date of the lump-sum distribution must be held for at least a year to be given long-term capital gains treatment. Cash or other nonemployer stock distributed as part of the lump-sum distribution will be taxed at ordinary income tax rates.
77. Implement strategies associated with international tax planning. For executives and high-earning consultants on assignment in foreign countries, consider strategies that will reduce your individual tax costs, such as maximizing the foreign earned income and housing exclusion provisions, and deductions and credits for foreign taxes paid. Foreign taxation can depend on foreign tax treaties and requires an individualized approach where double taxation of income is avoided. The preparation of tax equalization calculations may be beneficial in determining the breakdown of compensation to maximize tax benefits associated with international assignments. See the discussion later at items 131-136.
Planning Tip—It is always worth repeating that U.S. persons, including resident aliens, are taxed on their worldwide income at graduated rates regardless of whether the income is from a U.S. or a foreign source. Foreign-sourced income is taxed by the United States without regard to whether it is earned income, income from a trade or business, or investment-based income.
Planning Tip—If you find yourself in a change-of-life situation, where you no longer intend to reside or utilize your United States citizenship and find yourself dealing with adverse tax consequences year after year, it may be time to consider renouncing your U.S. citizenship or terminating your resident status. This has serious tax (and nontax) consequences as you will have to consider the U.S. mark-to-market exit tax as well as other ramifications.
78. Get a fresh pair of eyes to review tax planning. Corporate executives should consider whether additional tax assistance or supplemental wealth planning may add value. This third-party guidance may decrease conflict-of-interest risks presented by the dual activities of the employer company’s auditors performing tax services for company personnel. TAG administers a flexible Executive Tax Assistance Program designed for corporate executives, providing comprehensive, confidential and highly personalized individual and business tax preparation, planning and consulting services at group-discounted rates. TAG uses a strategic approach to provide comprehensive solutions to your needs.
Tax Planning Strategies for Businesses (Items 79 to 112)
79. Decrease your tax liability on pass-through income. Business income from pass-through entities is currently taxed at the ordinary individual tax rates of the owners or shareholders. Taxpayers who receive qualified business income from a trade or business through a partnership, limited liability company, S corporation and/or sole proprietorship are allowed a 20 percent deduction, subject to taxable income phaseouts and complex calculations, in arriving at taxable income. The deduction is also afforded to taxpayers who receive qualified real estate investment trust dividends, qualified cooperative dividends and qualified publicly traded partnership income. For owners with taxable incomes over $340,100 (joint filers) or $170,050 (all other filers), the deduction is subject to reduction or elimination based on the owner’s pro rata share of W-2 wages paid by the business and/or the business’ basis in qualified property.
In addition, for taxpayers who own a specified service business and whose taxable income exceeds $440,100 for married individuals filing jointly and $220,050 for all other filers, the deduction is phased out and no longer available.
A “qualified trade or business” is defined as any trade or business other than a specified service trade or business and other than the trade or business of being an employee. “Specified services” are defined as a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services (investing and investment management, trading, dealing in securities, partnership interests or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees). Notably absent from this list, and specifically excluded from the definition of specified services, are engineering and architectural services, as well as real estate agents and bankers.
Planning Tip—There are certain planning strategies taxpayers can use in order to take advantage of these deductions. The service businesses listed above should consider methods to increase tax-deferred income or decrease taxable income at the entity level, so that owners close to the $170,050/$340,100 threshold can take full advantage of the pass-through deduction. Some methods of reducing taxable income to fall within these thresholds include:
Planning Tip—The limitations and analysis in computing the qualified business income deduction are complex. We would be pleased to consult with you to assist in properly navigating these rules to ensure preservation of applicable deductions.
80. Take advantage of lower corporate income tax rates. Since 2018, corporations have been subject to a flat 21 percent tax rate. The 21 percent rate also applies to personal service corporations such as accounting firms and law firms. Over the past two years, legislation in Congress has consistently considered raising corporate tax rates. However, the Inflation Reduction Act of 2022 only created two new corporate tax provisions, expected to affect only a very small percentage of corporations: those with over $1 billion of income or publicly traded companies. See our discussion of these items above at items 13 and 14.
Under current law, the 21 percent corporate rate is not scheduled to expire until tax years beginning after December 31, 2025.
Observation—While the current corporate tax rate of 21 percent may seem more advantageous than the current personal income tax of up to 37 percent paid on pass-through income, the corporate tax structure may not be advantageous for owners of closely held business established as S corporations, limited liability companies or partnerships. While corporations may currently enjoy a lower tax rate on their profits, shareholders will encounter a second tax on dividends distributed to them. The profit of a corporation is taxed first to the corporation when earned and then taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not receive a tax deduction when it distributes dividends to shareholders and shareholders cannot deduct any losses of the corporation. Alternatively, income earned by pass-through entities is taxed only once at the owner level.
Another benefit to the pass-through structure of limited liability companies and partnerships is their flexibility for allocating income/loss and distributing cash/assets. The owners must agree on the allocations, and the allocations must have substantial economic effect. In addition, limited liability companies and partnerships are generally easier to form, manage and operate. They are less regulated in terms of laws governing formation because the owners control the way the business operates.
Businesses, particularly those in service industries that are excluded from the proposed pass-through deduction, should consider if electing C corporation status would be a more favorable structure. Companies that generate significant income, reinvest in their business and do not distribute cash to investors could see a benefit of a lower corporate tax rate. Further, transitioning to a C corporation may be advantageous if you anticipate long-term ownership. However, owners considering a transition to a C corporation should also be mindful of the accumulated earning tax (20 percent tax on companies maintaining too much cash) and the personal holding company tax (25 percent penalty on undistributed passive income earned in a closely held C corporation).
81. Evaluate your sales tax exposure. In light of the South Dakota v. Wayfair, Inc. U.S. Supreme Court decision, businesses should periodically review their operations to determine if they have additional sales and use tax exposure. Businesses that have large retail or e-commerce sales may be subject to sales or use taxes, even if they do not have a physical presence in the state or local jurisdiction.
Recently, however, the commonwealth of Pennsylvania ruled in favor of a taxpayer, stating that an out-of-state business selling products through Amazon’s Pennsylvania warehouse was not subject to sales and income tax in the state.
In a more aggressive interpretation, the Multistate Tax Commission (MTC), which is a conglomeration of state tax agencies seeking to define a uniform set of rules for determining sales and income tax nexus, issued guidance indicating that the following activities are sufficient to create nexus for an out-of-state business:
So far, California and New York have announced the adoption of the MTC’s provisions, with many more states expected to follow suit.
Accordingly, now is the time to perform an assessment of your business activities and make plans to become compliant (if warranted) in early 2023.
82. Evaluate your state tax exposure in light of increased telecommuting. In a post-COVID, remote work environment, virtually every state has taken the position that having an employee present within a state creates nexus and will potentially subject the employer to business registrations, employee withholding, registered agent requirements and/or business tax filings.
As such, each state where you have an employee working remotely must be closely examined, as every state has different methods for apportioning taxable income, sourcing revenue, minimum factor presence standards and other registration requirements. We have conducted many such assessments and would be pleased to assist.
83. Review your plans to entertain clients. The Consolidated Appropriations Act of 2021 provided a temporary 100 percent deduction for business meals provided by a restaurant for the 2021 and 2022 tax years. This expanded deduction lapses on January 1, 2023, at which time the limitation reverts back to 50 percent for most meals.
Since 2018, businesses have been unable to write off expenses associated with entertaining clients for business purposes. However, business meals paid concurrently with entertainment expenses are still 50 percent deductible, provided these expenses are separately paid for or separately stated on the invoice.
Observation—The term “restaurant” is defined as “a business that prepares and sells food or beverages for immediate consumption, regardless of whether the food or beverages are consumed on the premises.” Additionally, establishments that sell prepackaged food that is not intended for immediate consumption are still subject to the 50 percent limitation. A few examples of businesses that do not meet the definition of a restaurant include grocery stores, specialty food stores, liquor stores and convenience stores.
Planning Tip—Entertainment activities with clients should be reviewed before year-end to determine their deductibility for 2022. The deduction for meals is preserved, so to the extent possible be sure to break out on the invoice the food portion of any entertainment expense incurred, determine if the establishment qualifies as a “restaurant” under the new law and, as always, maintain contemporaneous logs or other evidence of the business purpose of all meals and entertainment expenditures. This may require enhanced general ledger reporting to minimize effort in segregating deductible and nondeductible meals and entertainment expenses.
It is important to remember that a companywide activity such as a holiday party or team building event is still deductible in full, even after December 31, 2022. Also 100 percent deductible are the costs of food or drinks provided to the public free of charge. Meals brought in for employees working late or for department meetings remain subject to the 50 percent limitation.
84. If you are looking to utilize bonus depreciation, plan your purchase of business property by year-end. For 2022, businesses can expense, under IRC Section 179, up to $1.08 million of qualified business property purchased during the year. This $1.08 million deduction is phased out, dollar for dollar, by the amount that the qualified property purchased exceeds $2.7 million.
Generally, qualified business property for purposes of Section 179 includes tangible personal property used in a trade or business, as well as nonresidential qualified improvement property, including, but not limited to, roofs, HVAC systems, fire protection and alarm systems and security systems. The qualified improvement property must also be placed in service after the date of the real property in order to qualify for accelerated depreciation under Section 179.
Additionally, bonus depreciation can be claimed on 100 percent of qualified new or used property placed in service during the year, and the first year bonus depreciation on passenger automobiles (vehicles with gross vehicle weight less than or equal to 6,000 pounds) is currently $8,000. Bonus depreciation of 100 percent under the TCJA is available for property placed in service after September 27, 2017, and before January 1, 2023. The definition of  “qualified property” for purposes of bonus depreciation has been expanded to include the purchase of used property, so long as the taxpayer has not previously used the property (such as in a sale-leaseback transaction).
However, beginning January 1, 2023, bonus depreciation drops to 80 percent of qualified new or used property, and under current legislation will continue to be phased down by 20 percent each year until completely phased out in 2027.
Qualified business property for purposes of bonus depreciation includes, but is not limited to, equipment and tangible personal property used in business, business vehicles, computers, office furniture and land improvements to a business, as long as the recovery period of the property is less than or equal to 20 years.
Observation—For a vehicle to be eligible for these tax breaks, it must be used more than 50 percent for business purposes, and the taxpayer cannot elect out of the deductions for the class of property that includes passenger automobiles (five-year property).
Planning Tip—If you are making multiple purchases of qualified property, pick assets with longer depreciable lives to expense. By doing this, you will depreciate your other assets over shorter recovery periods, thus accelerating and maximizing your depreciation deduction.
85. Select the appropriate business automobile. For business passenger cars first placed in service in 2022, the ceiling for depreciation deductions is $11,200. Higher deductible amounts apply for certain trucks and vans (passenger autos built on a truck chassis, including SUVs and vans). Vehicles such as SUVs and vans with gross vehicle weight ratings of between 6,000 pounds and 14,000 pounds are restricted to a first-year deduction of $11,200, in addition to the $26,200 that is permitted to be expensed under IRC Section 179. Automobiles that are used 50 percent or more for business are also eligible for bonus depreciation of up to $8,000. For vehicles placed in service in 2022, the depreciation limitation for passenger automobiles is $11,200 for the year the automobile is placed in service, $18,000 for the second year, $10,800 for the third year and $6,460 for the fourth and later years in the recovery period.
New Vehicle Depreciation in 2022
Passenger Automobiles
SUVs, Vans, Trucks
Maximum Section 179 allowed
Maximum bonus depreciation allowed
Year 1*
Year 2*
Year 3*
Year 4* and later
*Maximum amount of depreciation if electing out of or not qualifying for bonus depreciation and/or Section 179.
Illustration—If you purchase an SUV that costs $75,000 before the end of 2022, assuming it would qualify for the expensing election, you would be allowed a $26,200 deduction on this year’s tax return. In addition, the remaining adjusted basis of $48,800 ($75,000 cost, less $26,200 expensed under Section 179) would be eligible for a bonus depreciation deduction of $48,800 under the general depreciation rules, resulting in a total first-year write-off of $75,000. This illustration also assumes 100 percent business use of the SUV.
Observation—Beware: Although the accelerated depreciation for passenger automobiles and SUVs is appealing, if your business use of the vehicle drops below 50 percent in a later year, the accelerated depreciation must be recaptured as ordinary income in the year business use drops below 50 percent.
Additionally, taxpayers are strongly urged to keep track of business miles through manual logs or digital apps in order to support business use of listed property.
86. Capitalize research and development expenses rather than deduct them. The Tax Cuts and Jobs Act of 2017 made significant changes to research and development (R&D) expenses, which traditionally have been eligible for a write off in the year incurred. Beginning in 2022, instead of deducting R&D costs when incurred, businesses must now capitalize and amortize over a five-year period for U.S.-based research and a 15-year period for research conducted abroad. These new rules also apply to software development costs; however, real estate development and mining industries are exempt and are covered under different code provisions. It is also important to note that, even if the R&D project is abandoned or disposed of, no immediate deduction is available.
Observation—This change in accounting for R&D expenses does not impact the computation of the R&D tax credit, discussed above. The requirement to amortize R&D expenses only affects taxable income; the credit is still calculated based on the expenses incurred during the tax year.
87. Defer taxes by accelerating depreciation deductions with cost segregation. Cost segregation is a tax strategy that allows real estate owners to utilize accelerated depreciation deductions to increase cash flow and reduce the federal and state income taxes they pay on their rental income. Property that is placed in service after September 27, 2017, and has a class life of up to 20 years will generally qualify for 100 percent bonus depreciation. Real estate that is nonresidential property is generally classified as 39-year property and is not eligible for bonus depreciation. A cost segregation study allows for the appropriate allocation of costs amongst various class lives and may permit the owners to take advantage of greater depreciation deductions (including 100 percent bonus depreciation). Further, by frontloading allowable depreciation deductions to the early years of the property’s life, reclassification can result in significantly shorter tax lives and greater tax deferrals.
88. Consider simplifying accounting methods. If average gross receipts for the three prior years exceed $27 million in 2022, taxpayers are not permitted to use the simpler cash method of accounting, which could create an additional accounting expense. Similarly, businesses with average gross receipts of over $27 million are not able to account for inventories of materials and supplies, and taxpayers are forced to use the more complex uniform capitalization rules. Under the TCJA, the thresholds for both the cash method of accounting and the uniform capitalization rules were indexed for inflation and have increased from $26 million in 2021.
Planning Tip—If your business’ income previously exceeded the thresholds, but falls beneath the higher thresholds for 2022, determine whether the increased thresholds would make a tax accounting change a useful strategy.
89. Determine the merits of switching from the accrual method to the cash method of accounting. The accrual (rather than the cash) method of accounting is generally used by businesses that sell merchandise to account for revenue and inventory related to the merchandise. While this may provide a more complete picture of the financial status of a business, from a tax perspective it provides much less flexibility in terms of planning options and is more difficult to use than the cash method of accounting. The good news is that for the year 2022, businesses with average gross receipts over the last three years of $27 million or less that would otherwise be required to use the accrual method of accounting can elect to use the cash method. A C corporation that is a qualified personal service corporation is also allowed to use the cash method, as long as it does not maintain inventories for tax purposes, regardless of annual gross receipts. While there are some caveats to obtaining this relief, it is a tax-saving strategy worth considering if your business can meet the average gross receipts test and is currently using the accrual method of accounting.
90. Select the most tax-efficient inventory method. If your business tracks inventory, you may be able to realize meaningful income tax savings based on your selected inventory method. For example, in a period of rising prices, like we are currently in, using the last in, first out (LIFO) method can produce income tax savings since it assumes that the higher priced inventory units purchased last were the first ones sold. Conversely, in a period of falling prices, the first in, first out (FIFO) method will provide larger tax savings since it assumes that higher priced inventory units purchased first are the first ones sold. The IRS requires you to select an inventory method the first year your business is in operation. If you decide to make a change, you must alert the IRS and gain approval for the first tax year that you adopt the new method. Professional assistance may be needed.
91. Establish a tax-efficient business structure. The structure of your business can impact your personal liabilities as well as your tax liabilities. Businesses may operate under various structures, including general partnership, limited liability company, limited liability partnership, S corporation, C corporation and sole proprietorship. In particular, the C Corporation has a structure that can cause double taxation, especially upon the sale of a business. While the primary factors that distinguish one structure from another are often owner liability and income taxation, it is prudent to consider other characteristics as well. Some of the more pertinent considerations are summarized in the chart below. The entity selection decision should be carefully evaluated by you and your team of legal and tax advisers as it is one of the first and most important decisions made when setting up a business.
Considerations When Choosing Business Entity
C corporation
S corporation
Sole proprietor
Limited liability company
Limit on number of owners
No limit
Two or more
No limit
Type of owners
No limitation
Certain individuals, estates, charities and S corporations
No limitation
No limitation
Tax year
Any year permitted
Calendar year
Calendar year
Calendar year
Calendar year
How is income taxed
Corporate level
Owner level
Individual level
Owner level
Owner level, unless treated as an C corporation
Character of income
No flow through to shareholders
Flow through to shareholders
Taxed at individual level
Flow through to partners
Flow through to members
Net operating losses
No flow through to shareholders
Flow through to shareholders
Taxed at individual level
Flow through to partners
Flow through to members
Payroll taxes
Shareholder/officers subject to payroll taxes only on compensation
Shareholder/officers subject to payroll taxes only on compensation
Active owner subject to self employment taxes on all income; no unemployment tax
Active general partner subject to self employment taxes on all income; no unemployment tax
Active member subject to self employment taxes on all income; no unemployment tax
Distributions of cash
Dividends to extent of earnings and profits
Typically not taxable until accumulated adjustment account is fully recovered
No effect
No effect except for calculation of basis
No effect except for calculation of basis
Distribution of property
Dividend treatment, gain recognition to entity
Gain recognition to entity
No effect
No gain or loss to entity
No gain or loss to entity
Planning Tip—Self-employment taxes are rarely discussed during the formation of an entity, but should the entity choose a multimember LLC, careful structuring may help minimize the members’ exposure. Generally, the income of multimember LLCs is taxed as a partnership and income flows through to the partners, who may be subject to self-employment tax. However, the income of limited partners is not usually subject to self-employment tax unless the payments are guaranteed payments for services rendered. The IRS further restricts who may claim the limited partner exception to self-employment tax based on the partner’s involvement and activity within the entity. In order to avoid such treatment, a number of steps can be taken at entity formation to protect against inadvertent self-employment tax. The LLC may wish to form a management company, make a spouse the majority partner in the LLC or establish multiple ownership classes. If you are forming an entity, you need to ensure you have a knowledgeable tax adviser in your corner in order to maximize planning opportunities.
92. Consider the benefits of establishing a home office. With more people now working from home than ever before, taxpayers may wonder if they qualify for the home office deduction. Those taxpayers who own small businesses or are self-employed and work out of their home may very well have the ability to take advantage of the home office deduction if they heed the rules below. Currently, W-2 employees do not qualify to take the home office deduction.
Expenses related to your home office are deductible as long as the portion of your home that qualifies as a home office is used exclusively and on a regular basis as a principal place of business. This can be broken down into a few factors:
A simplified home office deduction ($5 per square foot, up to 1,500 square feet) is also available to taxpayers, which minimizes expense tracking while providing a flat rate deduction per square foot of office space. In addition to claiming a deduction for home office expenses, the ability to qualify as a home office may enable you to deduct the cost of traveling between your home and other locations where you conduct business.
Observation—Take advantage of the home office deduction if you meet the requirements. Using your home or apartment for occasional meetings and telephone/videoconferencing calls will likely not qualify you to deduct expenses for business use, even if you are working there full time during the course of the pandemic. The exclusive use test discussed above may be satisfied by remote workers, as long as you are using the space exclusively for business (i.e., you are not working from the kitchen table). However, the regular test as a continuous, ongoing or recurring basis may not be met if you have been required to return to the office. It is still unclear whether regular use for a short period of time, but not thereafter, will pass IRS scrutiny, so it is often best to tread lightly when claiming a home office, as home office expenses may not be worth the often nominal tax impact and potential audit exposure.
Also, there is a potential downside for claiming home office deductions. For example, on the sale of your home, home office depreciation previously claimed does not qualify for the exclusion of gain on the sale of a principal residence, which could result in additional tax when you sell your home. Additionally, be sure you meet all the requirements for claiming a home office deduction, as the deduction can be a red flag, prompting IRS inquiry. It will be important to be proactive in your tax planning and maintain accurate record keeping.
93. Examine and properly classify your independent contractors and employees. The question of whether a worker is an independent contractor or employee for federal income and employment tax purposes is a complex one. It is intensely factual, and the consequences of misclassifying a worker can be serious. In general, the person (or entity) who controls how a job is performed is the employer. There are many factors requiring assessment to properly determine degree of control, as discussed below. Therefore, if the worker has control, the worker is self-employed and an independent contractor subject to self-employment taxes. On the other hand, if a worker is an employee, the company must withhold federal income and payroll taxes, pay the employer’s share of Federal Insurance Contributions Act taxes on the wages plus Federal Unemployment Tax Act tax, and often provide the worker with fringe benefits that are made available to other employees. There may be state tax obligations as well. Since these employer obligations do not apply for a worker who is an independent contractor, the savings can be substantial.
Observation—The IRS continues to intensely scrutinize employee/independent contractor status. If the IRS examines this situation and reclassifies the worker as an employee, not only are employment taxes due, but steep penalties will be assessed. The IRS’ three-category approach―behavioral control, financial control and type of relationship―essentially distills the 20-factor test the IRS had used to determine whether a worker was an employee or an independent contractor. The gig economy is also changing the landscape by challenging the use of traditional criteria to assess a worker’s classification. Consider seeking professional guidance to review your worker classifications.
94. Maximize business deductions and minimize employee taxable income by establishing an accountable expense reimbursement plan. An accountable plan reimburses employees for work-related expenses by utilizing specific reporting, substantiation of business expenses and return of any excess cash advances. Employers are allowed to deduct, and employees allowed to exclude from gross income, employer expense reimbursements if paid under an accountable plan. Since both the employer and employee benefit from establishing an accountable plan, the need to specifically track expenses is usually worth the minimal extra effort over a nonaccountable plan.
Observation—An accountable plan is a process of reimbursing an employee, through proper and formal expense reimbursement and reporting procedures, for business-related expenses, and therefore not included in compensation and ultimately not considered taxable income. The costs must be business-related; therefore, it is imperative to maintain segregated and accurate accounting of expenses. Examples of reimbursable expenses can be the business use of a cellphone or professional dues associated with one’s career. The key is to develop a reimbursement process that is consistent and well documented within the organization.
95. Lower your effective tax by employing your child or grandchild. You can employ your children or grandchildren, which shifts income from you to them―and typically subjects the income to the child’s lower tax bracket and may actually avoid tax entirely (due to the child’s standard deduction). Since this is not investment income, the earned income is not subject to the kiddie tax. There are also payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from both Social Security and Medicare taxes, while payments for the services of a child under the age of 21 are not subject to Federal Unemployment Tax. Payments to children by a corporation or partnership are not exempt from these payroll taxes, however. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA. (See item 49.)
Observation—When employing your child or grandchild, keep in mind that any wages paid must be reasonable given the child’s age and work skills. Also, if the child is in college or entering soon, excessive earned income may have a detrimental impact on the student’s eligibility for financial aid.
96. Don’t overlook your business tax credits. Credits are dollar-for-dollar reductions in tax and are much more valuable than deductions. Employers can claim the work opportunity tax credit, which is equal to a percentage of wages paid to employees of certain targeted groups during the tax year. Other credits, such as the retirement plan tax credit, may also be available, but certain actions must take place before year-end to qualify. Employers can also receive tax credits for other employee-provided services such as child care facilities/services, making improvements so businesses are accessible to persons with disabilities, and providing health insurance coverage to employees. Credits are also available for paid family and medical leave if an employer has written policies in place.
97. Conduct a research and development (R&D) study to maximize your R&D tax credit. The R&D credit may be claimed by taxpaying businesses that develop, design or improve products, processes, formulas or software. Many states also have an R&D credit. More industries and activities now qualify for the R&D tax credit than ever before. The credit is even available for professional firms that develop or improve software for use in their business. Businesses of all sizes should consider accelerating research and development expenses, including qualified software development costs, prior to year-end.
98. Generate payroll tax credits with the R&D tax credit. While it is generally known that the R&D tax credit can be applied to income taxes and the AMT (as long as certain requirements are met), qualified small businesses can also use the R&D tax credit against their Social Security payroll taxes. To qualify for this credit, a small business must: (a) have gross receipts of under $5 million for the current tax year; (b) have had gross receipts for five years or less, including the current year; (c) have qualifying research activities and expenditures; (d) have R&D credits it can use in that year; and (e) incur payroll tax liabilities. Businesses can generate up to $250,000 in payroll tax credits per year for five years, and any unused portion can be carried forward to future years. The payroll tax offset is available on a quarterly basis beginning in the first calendar quarter that begins after a taxpayer files their federal income tax return. The payroll tax credit election may especially benefit eligible startup businesses having little or no income tax liability. Contact us for assistance in determining activities eligible for these incentives and the assessment of the appropriate documentation required to support your claim.
99. Perform a compensation study. Businesses can maintain deductibility, yet avoid payroll taxes, on compensation moved from salary to fringe benefits. Employees will enjoy the tax savings resulting from lower taxable compensation. Benefits typically shifted include medical insurance and employee discounts. This may be a positive way to attract and retain employees. It is important to note, however, that transportation fringe benefits are not deductible by the employer unless included in the employee’s W-2 wages.
Planning Tip—In this competitive employee market, employers are finding it necessary to increase both wages and benefits. One terrific tool is the $5,250 employer-provided tuition assistance reimbursement. Your employees will benefit from untaxed compensation, while the employer utilizes a compensation tool not subject to employment taxes. (See item 112.)
Utilizing a qualified plan for employee expense reimbursements is another way both employer and employee may enjoy tax-advantaged benefits, while also potentially helping the employer save on office expenses. We would be happy to help ensure that your plan meets IRS requirements.
Transportation benefits are another way to provide tax advantaged benefits. The costs for parking, transit passes and vanpooling are tax-free up to a set monthly limit ($280 in 2022).
Also consider paying dividends in lieu of owner salaries in a family owned C corporation. If you personally expect to be in the 32 percent or higher tax bracket for 2021 and you own a C corporation, you could net more cash after taxes by paying yourself some dividends in lieu of additional salary. This is because dividend income is subject to a maximum 20 percent tax rate, while your salary is subject to your 32 percent or higher tax rate―plus you and your corporation must pay payroll taxes on your salary.
Observation—Any dividends paid to you must be paid to other owners as well. This is ideal in the context of a family owned C corporation, since a family recipient who is in the 10 percent or 12 percent tax bracket (which many children are) will not pay taxes on this dividend income. On the other hand, however, if there are multiple nonfamily member shareholders, paying dividends could alter the bottom-line cash flow available to the various shareholders, which may make this strategy unworkable in some situations.
100. Enhance employee health by establishing health savings accounts (HSAs) and other cafeteria plans (i.e., Section 125 plans or flexible spending accounts). These plans provide an IRS-approved way to lower taxes for both employers and employees, since they enable employees to set aside, on a pretax basis, funds from their paychecks for adoption expenses, certain employer-sponsored insurance premium contributions, dependent care costs and unreimbursed medical expenses. Furthermore, Section 125 plans are permitted to offer salary-reduction HSA contributions for eligible employees as part of the menu of plan choices. Thus, employers can sponsor the HSAs and employer contributions are not subject to income or employment taxes.
Funds contributed by employees are free of federal income tax (at a maximum rate of 37 percent), Social Security and Medicare taxes (at 7.65 percent) and most state income taxes, with the notable exceptions of California and New Jersey (at maximum rates as high as 11 percent), resulting in a tax savings of as much as 55.65 percent. As a result, the employer also pays less in Social Security matching tax. Like an accountable expense reimbursement plan, it can assist an organization in achieving its strategic goals by enhancing its ability to attract and retain talented, experienced people. Since many restrictions apply, you should carefully review this arrangement before instituting a plan.
Planning Tip—Since there is no joint HSA, married couples should consider reviewing their beneficiary information and naming their spouse as beneficiary of their HSA, as the surviving spouse is not subject to income tax on distributions as long as they are used for medical expenses. Anyone other than the spouse will be taxed on the balance remaining in the HSA upon the account owner’s death.
101. Draft a succession plan. For any business owner, a strategy for the transfer of the business to new ownership must be in place in the event of the owner’s death, disability or retirement. Failure to properly plan for an ownership transition cannot only turn a successful business into a failed business, it can also create a greater tax burden. You will need to identify candidates for leadership as well as ownership roles, while also considering estate and gift tax consequences. Together with your lawyer, CPA and financial advisers, you can transfer control as desired, develop a buy-sell agreement, create an employee stock ownership plan and carry out the succession of your business in an orderly fashion.
102. Deduct your business bad debts. If your business uses the accrual method of accounting, it is prudent to examine your receivables before year-end, as business bad debts are treated as ordinary losses and can be deducted when either partially or wholly worthless. Do not pour salt into the wound by paying income tax on income you will never realize; not being paid for services or merchandise that you have sold is bad enough.
103. Do not become trapped by the hobby loss rules. If your business will realize a loss this year, you need to consider the so‑called hobby loss rules to ensure that the business is treated like a business, not a hobby, and that the loss will be deductible. If an activity results in a profit in three out of the last five years, it will be assumed to be for profit and not a hobby. Even if the activity is not for profit, the income must be included on your tax return, though the income may not be subject to self-employment taxes.
104. Sell your company’s stock, rather than its assets. If you are considering selling your business, try to structure the transaction as a sale of the company’s stock rather than a sale of the company’s assets. A sale of your company’s stock will be treated as the sale of a capital asset and the preferential long-term capital gain rates will apply. A sale of the company’s assets, on the other hand, will typically result in at least some of the gain being taxed at the much higher ordinary income tax rates. However, since the buyer will generally want to structure the transaction as a purchase of the company’s assets in order to increase his or her depreciation deductions, some negotiating by both parties should be expected. The sale of a business is a complex transaction and you should consult your legal and tax professionals when considering a sale.
Utilizing an installment sale is another potential tool to help defer gain or spread the income into multiple years and potentially benefit from lower rates.
105. Consider installment sale treatment for sales of property at a gain. When property is sold, gain is generally included in income when the asset is sold. Using the installment sale provisions can delay the tax impact of the sale until the funds are collected. The installment method is required in cases where there is a sale of property and the seller receives at least one payment after the year in which the sale occurs, typically deferring a substantial part of the tax on the sale to later years. Under the installment method, gain is recognized ratably over multiple years on the sale to the extent that payments are made on the installment note, subject to a gross profit computation. This method allows you to recognize gain only to the extent of payments actually received, and is a valuable method to defer income. If cash is being received over multiple years and you do not want to use the installment sales method to report the income, an election is available to “elect out” of the installment sale treatment and pay the entire amount of tax due on the gain in the year of sale. You have until the due date of your return (including extensions) to elect out of installment reporting. In addition, not all states recognize this type of gain treatment, so the state tax effects also need to be considered.
Observation—The IRS also imposes an additional interest charge on installment sale obligations if the total amount of the taxpayer’s installment obligations at the end of the tax year exceed $5 million. The interest charge is assessed in exchange for the taxpayer’s right to pay the tax on the installment sale income over a period of time.
Planning Tip—Many types of transactions are not eligible to be reported under the installment sale method. These transactions include a sale at a loss, sales of stocks or securities traded on an established securities market, and a gain that is recaptured under IRC Section 1245. If an ordinary gain is incurred through depreciation recapture, it is recognized in the year of the sale even if no cash is received.
106. Set up a captive insurance company to realize insurance cost savings. For certain groups, setting up a small “captive” insurance company, which is owned and controlled by the insureds, may result in insurance savings, particularly when there is a high loss ratio anticipated from claims. In addition, small captives qualifying under IRC Section 831(b) (known as “microcaptives”) pay income tax only on investment income, not underwriting income, and have dividends taxed as qualified dividends. Note that Section 831(b) does contain some restrictions; for example, the insurance company must have net written premiums (or, if greater, direct written premiums) for the taxable year that do not exceed $2.2 million. Generally, these captives are set up among related companies, companies within the same industry or companies affiliated with some association. Microcaptive insurance companies have recently come under increased IRS scrutiny, so it is imperative that you consult with professionals before setting one up.
107. Lease modifications may generate unintended tax consequences. With the fluctuating real estate market of the past few years, many businesses have entered into lease modification negotiations with their landlords. However, businesses should look at potential tax impacts. IRC Section 467 was originally enacted as an anti-abuse provision to prevent tax shelters that took advantage of certain timing differences. Leases can be governed under Section 467 in the event of modification and can result in the inclusion of income if lease terms are substantially modified by:
Moving forward, lease modifications will remain a very complicated issue. It is important to remember that regardless of modifications caused by the economic downturn, leases must be reported on an accrual basis. Comprehensive contract analysis and Section 467 testing will be required on a case-by-case basis as lessors and lessees continue to navigate the rapidly evolving economic landscape.
108. Fly solo with a one-participant 401(k). A solo 401(k) is a one-participant 401(k) similar to a traditional 401(k), except that it covers only the business owner or owner plus spouse. For the most part, these plans have the same rules and requirements as any other 401(k) plan. The business owner is both employee and employer in a 401(k) plan, and contributions can be made to the plan in both capacities allowing for employer contributions, elective deferrals and catch-up contributions. For 2022, the solo 401(k) total contribution limit is $61,000, or $67,500 if you are age 50 or older. The owner can contribute both:
Planning Tip—Because solo 401(k) plans cover only highly compensated employees (i.e., the owner) they are not subject to the actual contribution percentage (ACP) and actual deferral percentage (ADP) tests and can therefore be easier and less expensive to maintain than other 401(k) plans.
Observation—It is important to keep track of the value of the assets within a solo 401(k). Though they do not require ACP or ADP testing, one-participant 401(k) plans are generally required to file an annual report on Form 5500-EZ if the plan has $250,000 or more in assets at the end of the year. A one-participant plan with fewer assets may be exempt from the annual filing requirement. Please track and report to the fund administrator the asset value and make sure any Forms 5500 are timely filed. If you have an established solo 401(k) plan, experienced significant appreciation due to market gains and are unsure if a Form 5500 has been filed, please contact your tax adviser as soon as possible.
109. Authenticate your business expenses. You must be ready to prove to the IRS, state or even local tax authority anything you put on a tax return. In particular, certain expenses like travel, meals, transportation expenses, gifts, entertainment (if applying to state or wages of employee) and those expenses associated with listed property (e.g., vehicles) are subject to more specific and demanding rules regarding substantiation and documentary evidence. Deductions in these categories can be disallowed, even if valid, if the below contemporary evidence is not properly maintained for the expense:
Planning Tip—To meet the adequate records requirement, you could maintain (1) an account book, diary, log, statement of expense, trip sheets or similar record as well as (2) documentary evidence that, in combination, are sufficient to establish each element of an expenditure or use for travel or entertainment. However, it is not necessary to record information in an account book, diary, log, statement of expense, trip sheet or similar record that duplicates information reflected on a form of documentary evidence as long as they complement each other in an orderly manner.
Documentary evidence (paid bill, written receipt or similar evidence) is required to substantiate all expenses of $75 or more. A written receipt is always required for lodging while traveling away from home, regardless of the amount. However, for transportation charges, documentary evidence is not required if not readily available (e.g., cab fare).
Observation—A credit card statement is not sufficient documentary evidence of a lodging expense. Instead, a hotel bill showing the components of the hotel charge is required.
110. Continue to enjoy relief for multiple employer plans. A multiple employer plan generally is a single plan maintained by two or more unrelated employers. Before 2021, these plans could run afoul of the “one bad apple rule” when one employer (or the plan itself) failed to satisfy an applicable qualification requirement resulting in the disqualification of the plan for all employers. For plan years beginning after December 31, 2020, relief from the “one bad apple” rule is provided for “covered multiple employer plans.” For 2021 and moving forward, unrelated employers are more easily able to band together to create a single retirement plan.
Observation—A single, multiple employer plan can provide economies of scale that result in lower administrative costs than would otherwise apply to a group of separate plans covering the employees of different employers. However, concern that a violation by one or more employers participating in the plan may jeopardize its tax-favored status or create liability for other employers may have discouraged use of multiple employer plans in the past. With this rule change, Congress believes employers in a multiple employer plan should not be subject to the risk that any inadvertent or unintentional violation by a noncompliant plan member could result in negative tax consequences for the employer members that are compliant.
111. Claim a small businesses credit for starting a pension plan. In the current environment where retaining good employees is critical for business survival, Congress has allowed a credit equal to 50 percent of certain costs incurred when setting up a pension plan for employees. The credit is generally limited to $250 per employee per year, but the limit is no less than $500 and no more than $5,000. So, if you spend $12,000 this year in establishing a plan, and $11,000 in the next two years on administration and employee education, you would be eligible for a $500 credit against your taxes in each of those three years if you have one employee, a $1,250 credit if you have five employees and a $5,000 credit if you have 25 employees. (Before 2020 the limit was $500 a year and did not increase based on the number of employees.)
To qualify for this credit, taxpayers must:
Planning Tip—Businesses that have had a pension plan in the last couple of years may consider waiting three years from the time the plan was terminated before starting a new plan in order to qualify for the credit. As an example, if you had a plan that was terminated in 2019, you would have to wait until 2023 to start a new plan and qualify for the credit. Also, it is important to consider that any expenses utilized in determining this credit cannot also be deducted as regular business expenses. While credits typically are more advantageous than deductions because they represent a dollar-for-dollar reduction in tax liability, the limitations on this credit could result in a situation where deducting the costs as business expenses would maximize the tax benefit.
Observation—There are several types of plans you can establish for your employees and still qualify for the credit. For example, you could start a pension, profit sharing or an annuity plan, among other choices. If you think the time is now to establish one of these plans, please reach out to your tax adviser.
112. Reward past employee education with an excluded tax benefit. Do you want to help ease the minds of your employees while retaining their talent and recognizing the costs incurred for them to obtain that talent? Through 2025, employers can exclude from an employee's gross income any payments made by an employer of principal or interest, up to $5,250, on any qualified education loan incurred by the employee. Qualified student loan payments must be aggregated with any other educational assistance received by the employee when applying the statutory maximum of $5,250.
Planning Tip—If you are seeking to retain talented employees with varying levels of student loans, this is a great avenue to reward your employees tax-free. They will feel compensated by receiving a debt payment on their outstanding loans while incurring no gross income.
Tax Planning Strategies for Nonprofits (Items 113 to 115)
113. Utilize a private foundation to accomplish charitable goals. While donor-advised funds are increasingly popular among philanthropic individuals, private foundations may offer certain advantages to families looking to create a multigenerational plan for charitable giving. Since private foundations can exist in perpetuity, they are an excellent vehicle to carry on a founder’s family name. Generally, donor-advised funds are not legally separate from the 501(c)(3) sponsoring organization and may have time limits. Further, while donor-advised funds usually follow a donor’s direction in gift giving, they are not legally required to follow those wishes. Private foundations may provide donors with greater flexibility in gift giving.
However, private foundations are not without their limitations. Excise taxes are assessed annually on investment income, and foundations must distribute 5 percent of their assets each year. In 2020, the excise tax rate for private foundations was reduced to 1.39 percent of net investment income rather than the previous 2 percent, with a further reduction to 1 percent in certain cases.
Potential Legislation Alert—The bipartisan Accelerated Charitable Efforts Act was introduced in June 2021. This initiative proposes to change certain rules around the 5 percent minimum distribution requirement so that salaries or travel expenses paid to foundation family members do not count as charitable distributions. The proposal also includes a provision so that distributions by private foundations to donor-advised funds would not count against the 5 percent minimum distributions requirement. This would end the ability of a private foundation to meet this requirement using donor-advised funds. While the bill remains with the Senate Finance Committee for consideration, it is looking increasingly unlikely that the bill will advance prior to the end of the current Congress. However, given its bipartisan support, the bill could resurface in a future Congress.
We can assist you, based on your unique situation, in determining whether a private foundation is a good fit for you.
114. Beware of the recapture of tax benefits on property not used for an exempt purpose. When a donor makes a charitable contribution of tangible personal property that is not used for exempt purposes and the donor originally claimed a deduction for the fair market value of the property, the donor’s tax benefit may need to be adjusted.
If a donee organization disposes of applicable property within three years of the contribution of the property, the donor claimed a deduction of more than $5,000, and the organization does not certify that the property was substantially used for the organization’s exempt purpose or the intended use became impossible, the donor is subject to a tax benefit adjustment.
If the donation is significant, the donor may consider formalizing the donee organization’s strategy regarding the property or agreeing to indemnify the donor.
A $10,000 penalty applies to a person that identifies applicable property as having a use that is related to either a purpose or function of the organization constituting the basis for the donee’s exemption knowing that it is not intended for such use. If recapture is necessary, the amount to include in the donor’s income is the amount claimed as a deduction in the year contributed less the donor’s basis in the property when the contribution was made. If the result is positive, it must be reported as income in the year the qualified organization disposes of the property.
115. Ensure that your private foundation meets the minimum distribution requirements. A foundation is required to distribute approximately 5 percent of the average fair market value of its assets each year. Qualifying distributions meeting this requirement include grants and certain operating expenses. Penalties are imposed in the form of an excise tax on the foundation if it fails to make qualifying distributions within 12 months after the close of the tax year.
Tax Planning Strategies for the Preservation of Wealth (Items 116 to 130)
116. Review your estate planning documents. At this time last year, there was much speculation regarding potential legislation and significant reductions to the federal estate, gift and generation-skipping transfer unified credit that was previously doubled by the TCJA. While proposed changes may have been abandoned, at least for the time being, the increased exemptions are still scheduled to sunset in just three short years. In anticipation of the future changes, if you have not examined your estate plan within the last few years, you should consider doing so immediately. Without intervention, the favorable changes enacted by the TCJA will lapse back to their pre-2018 amounts at the end of 2025 (the unified credit will be reduced by over $6 million after considering inflation).
While addressing your will, also consider the benefits of a living will, medical power of attorney, healthcare directives, durable power of attorney and the appropriateness of your beneficiary designations on your retirement accounts and life insurance policies.
Planning Tip—One easy step to take in reducing your exposure to the estate tax is to make annual gifts before the end of the year. In 2022, an unmarried donor may make a gift of $16,000 to any one donee, and a married donor may make a gift of $32,000 to any one donee as the gift can be considered split with his or her spouse, without using any of their unified credit or incurring a gift tax. Thus, a gift of $64,000 may be made by a husband and wife to another married couple, free of gift tax and with no impact on the unified credit. In 2023, the annual gift tax exclusion increases to $17,000, so a married couple will be able to similarly gift $34,000 to an individual and $68,000 to a married couple. Additionally, the IRS has issued a regulation that stipulates that all gifts sheltered under the current rules will remain so even after the law is changed. This means that if a reduction in the unified credit occurs, either due to the sunset of the TCJA or the passage of new legislation, and the taxpayer gifts over $10 million under the current rules, they would not be retroactively taxed if they pass away once the unified credit is lower.
Further, medical and education expenses paid directly to the providing institution are not subject to gift tax. In addition, as indicated in the education planning section of this guide, contributions to Section 529 plans may also qualify for special gift tax exclusion treatment, as discussed earlier in item 55. A substantial tax reduction can be achieved by making gifts to your children or grandchildren.
117. Take advantage of high exclusions. As discussed above, the annual gift tax exclusion will increase to $16,000 for 2022 and will further increase to $17,000 in 2023. The estate and gift tax unified credit will increase from $12,060,000 in 2022 to $12,920,000 in 2023. For both simple and complex trusts, grantors should consider funding in 2022 or 2023 to take advantage of this credit, since it is scheduled to sunset on January 1, 2026.

2022 Year-End Tax Planning Guide - Lexology
Illustration—Gifts are generally only subject to the gift tax under limited circumstances. For example, suppose Mary funds an irrevocable trust for the benefit of her daughter. Mary was never married. In 2022, she contributes $1.016 million to the trust. The first $16,000 of any present interest gift in 2022 can pass freely to the recipient without consuming any of Mary’s lifetime credit. When a gift is made to a trust, a gift tax return must be filed for the year, but no gift tax is paid unless the gift exceeds Mary’s remaining lifetime unified credit. Since Mary has made no gifts exceeding the annual exclusion amount during her lifetime and has never filed a gift tax return to reduce her unified credit, she would reduce her $12.06 million credit by $1 million, resulting in no taxable gift, no tax liability and the removal of appreciated assets from her estate. (The entire amount of the $1 million gift was offset by the unified credit.)
Annual exclusion
Unified credit
Taxable gift
Gift tax due
Credit before gift
Credit used toward gift
$1,000,000 (a)
Credit remaining
(a) $1,016,000 gift less annual exclusion of $16,000 = $1 million credit used
Observation—Although major tax legislation seems unlikely with a split Congress, there remains an impending threat that taxpayers passing away after 2025 who had gifted more than the inflation adjusted $10 million exclusion would face a “clawback” of the gift tax exclusion upon death. To mitigate this fear, the IRS previously released final regulations stating that, to the extent a higher basic exclusion amount was allowable as a credit in computing gift tax during the decedent’s life, the sum of these credits used during life may be used as a credit in computing the decedent’s estate tax. For example, if a taxpayer utilized the entire $12.06 million credit for 2022 gifts, and the decedent dies in 2026 after the credit is reduced to $6.8 million (adjusted for inflation), the entire gift of $12.06 million would still be excluded at the taxpayer’s death in 2026 or beyond. Therefore, it may make sense to fully utilize the current credit over the next few years.
Planning Tip—All of the strategies and observations noted in this guide are aimed at minimizing your income and gift tax costs. In other words, it is important to ensure that your current and future wealth is not unduly diminished by those taxes. We strongly recommend that you consult with estate planning professionals to discuss topics such as gift, estate and generation-skipping transfer tax unified credit, the unlimited marital deduction, each spouse’s credit and related items.
118. Consider gifting income-producing or appreciated property. By gifting income-generating or appreciated property in lieu of cash, the donor can accomplish three important benefits. First, and most importantly, the gift will serve the purpose of assisting the donee. Second, if the donee is in a lower tax bracket than the donor or exempt from the NIIT, the donor and donee will likely experience some collective tax savings by shifting the income to a lower bracket. Third, the value of the gift is also removed from the transferor’s estate. This is an easy, effective way to pass on wealth.
119. Consider making payments for tuition or medical expenses. Medical and education expenses paid directly to the providing institution are not subject to gift tax and generation-skipping transfer tax rules. Also, any such payments do not count toward the taxpayer’s annual gift tax exclusion. In addition, contributions to Section 529 plans may also qualify for special gift tax exclusion treatment. For example, should a grandparent make tuition payments and utilize up to $16,000 in gift exclusions to a grandchild, the yearly tax savings could be significant.
120. Utilize a spousal lifetime access trust (SLAT) to take advantage of current, high unified credits. As we mentioned previously, it is likely that the unified credit is near its historical peak, with the current credit scheduled to sunset in 2026 and revert to an inflation adjusted $6.8 million. In order to take advantage of the current credit, married persons can each gift the amount of the credit to a SLAT, utilizing the credit on the gift and paying no gift tax. In a SLAT, after the donor spouse gifts to the trust, the donee spouse can request distributions of income or principal from the trust, thus preserving access for the couple to the trust assets. However, if principal is distributed, the SLAT assets distributed will be brought back into the estate, defeating the original intent of forming the SLAT―so exercise caution when taking distributions. Upon the donor spouse’s death, the assets in the trust (and subsequent appreciation) are not subject to the estate tax.
Planning Tip—If you are trying to provide for a nonresident spouse, a qualified domestic trust (QDOT) may be appropriate. Under the estate tax, a noncitizen surviving spouse is generally not entitled to the same marital deduction afforded to citizen spouses. To circumvent this roadblock, the U.S. spouse can transfer assets to a QDOT, which defers the federal estate tax following the death of the first spouse until the death of the surviving noncitizen spouse. The surviving spouse may receive income from the trust but any distributions of principal may be subject to estate tax, except in certain hardship situations. Upon death of the surviving spouse, the assets of the QDOT will finally be subject to the estate tax. Incidentally, the annual exclusion for gifts to a noncitizen spouse is increasing from $164,000 in 2022 to $175,000 in 2023.
121. Tread carefully when considering the use of a grantor retained annuity trust (GRAT) for inter vivos wealth transfer. In a GRAT, a grantor contributes assets to a trust while retaining annuity payments for a defined period of time, with the remainder payable to beneficiaries. Depending on the structure of the GRAT, one can achieve maximum wealth transfer with little to no gift tax effect or use of the lifetime exclusion. However, should the grantor pass away prior to the completion of the annuity payments under the GRAT, at least a portion and possibly all of the GRAT assets are includible in the grantor’s estate. Thus, by terminating the annuity and trust before December 31, 2025, when the new higher federal estate tax threshold is set to expire, one can reap all of the benefits of a GRAT with minimal risk, while retaining the use of the grantor’s applicable exclusion amount.
Observation—GRATs generally perform best in low-interest rate environments. Since interest rates are on the rise, GRATs may be losing some of their luster. However, GRATs remain a conservative way to manage valuation risk, and with the significant market downturn, there is potential for significant rebound and appreciation during the annuity period.
Planning Tip—Another way to retain access to an asset while passing it down to the next generation is by utilizing a qualified personal residence trust (QPRT). By transferring a house to a QPRT, the grantor can continue to use the residence as his or her own for a specified period, after which the residence passes to the beneficiaries. At this point, and depending on the terms of the trust, the grantors may pay rent to remain in the home. The initial transfer to the QPRT is a taxable gift of the remainder interest in the home, using a rate published by the IRS. A QPRT allows the grantor to gift the home to the trust for a discounted value, using less of the exclusion, and shields future appreciation of the home from the estate tax. This is a particularly effective strategy in a high-interest rate environment because the higher the rate, the higher the present value of the grantor’s right to use the residence―and the lower the value of the gift of the future remainder interest.
122. Gift or sell assets to an intentionally defective grantor trust (IDGT). Traditionally, donors would gift assets to an IDGT, which would result in a completed gift during their life. This would use up some of their gift tax exemption, but shield appreciation in the assets from the estate and gift taxes. As such, this is best accomplished by gifting assets that are expected to increase in value the most.
123. Utilize a charitable remainder trust (CRT) or a charitable lead trust (CLT) to transfer wealth and benefit charity. As you would expect, both trusts involve the donation of a portion of the assets transferred into the trust to charity, but the timing and functions of both are very different. Both a CLT and CRT permit the donor to remove the asset from their estate. The differences arise in the areas of recipients of the annuity payments and the distribution of the remaining funds.
A CRT is created to ensure the donor’s financial future. Under a CRT, appreciating assets such as stocks are contributed to the trust and the donor receives an annuity for a term of years, even though the asset is no longer considered as part of the donor’s estate. Upon the donor’s death, a charitable organization receives the remaining assets.
A CLT is predominantly focused on the tax-efficient distribution of the donor’s wealth to beneficiaries. First, the donor makes a taxable gift equal to the present value of the amount that will be distributed to the remainder beneficiaries. In a CLT, the charities “lead” and receive the annual annuity payments. The amount remaining at the completion of the term is then distributed to the beneficiaries. The benefit of this type of trust is threefold: It allows for the reduction in the value of the settlor’s estate, while also providing for charities and beneficiaries.
Planning Tip—CRTs are more advantageous in a high-interest rate environment because higher interest rates result in a higher valuation of the future charitable remainder interest and gives the grantor a higher charitable income tax deduction. Unlike CRTs, CLTs are more advantageous in a low-interest rate environment.
124. Review trust residency qualifications often. The most difficult aspect of trust residency is that each state has different rules and qualifications for determining whether a trust is resident or nonresident. For example, most trusts created by a will of a decedent or funded while the donor was considered a resident of Pennsylvania are considered resident trusts. However, a state like Kansas only considers a trust as resident if it is administered in the state. Each state and situation differs for trust taxation. There is a myriad of other factors that may impact the nexus of a trust, such as beneficiary and/or trustee residence. We recommend contacting your tax adviser on any questions regarding trust residency.
125. Intra-family loans can still be beneficial for both the borrower/donee and the lender/donor. In this situation, the lender would be required to charge the minimum applicable federal rate. As of December 2022, that rate ranged between 4.27 percent and 4.55 percent, depending on the term. With increasing volatility in the markets and high interest rates, it is not likely that borrowers would choose to invest proceeds and try to “beat” the intra-family loan rate at this time. However, if a donor chose to loan a beneficiary money to buy a home, with rising average mortgage rates estimated anywhere between 6.25 percent and 7.25 percent, there is room to make an arrangement beneficial for both parties. For the donee, if the loan is secured and properly recorded, it could be deductible on their tax return, while likely paying significantly less than what would be charged by a typical lending institution. For the donor in a volatile stock market, the mortgage could very well generate a better rate of return than a standard investment could, all while secured by real property.
126. Consider the benefits of a revocable trust. In most cases, wills are drafted to specify how assets should be distributed upon death. However, revocable trusts can provide numerous advantages over wills. One significant advantage is the avoidance of probate, which is the process of the legal administration of a person’s estate in accordance with their will or state law if there is no will in place. Having a revocable trust eliminates any uncertainty in connection with the probate process. Other benefits of revocable trusts are the addition of privacy to the estate plan and protection against incapacity.
127. Utilize life insurance properly. Whether intended to pay estate taxes, protect the family of a deceased “breadwinner” or fund ongoing business structures, there are many reasons why taxpayers should obtain life insurance. Typically there are two different types of life insurance policies taxpayers may select: term life insurance, which provides coverage over a specific period of time (the most popular option being “premium level”), and permanent life insurance, which provides coverage until the taxpayer dies or cancels the policy. A few examples of permanent life insurance include whole, universal and variable.
While life insurance may not be for everyone, it is worth looking into to see if your situation would benefit from it. For instance, business owners may want to guarantee they will be able to continue functioning after the loss of an important employee, or ensure survivor income for the deceased’s family. In addition, the business may want to provide inheritance for family members who are not directly involved with the business. In terms of estate taxes, high-net-worth individuals may still be plagued with a financial burden after the death of a taxpayer. Those electing to use insurance proceeds in order to provide cash for the estate tax payment may soften the blow of having to resort to using other tactics, such as liquidating assets.
A taxpayer may also choose to establish an irrevocable life insurance trust, whereby the policy is considered an asset of the trust and ownership is effectively transferred to another person. Then, upon death, the benefits are not included in the decedent’s estate. Otherwise, the life insurance may be taxed in the deceased’s estate based upon the value of the death benefit, even for term insurance.
When deciding who should fund the life insurance premiums, keep in mind that if a business owner is funding the premiums, there could be various related income tax issues. In addition, gift tax issues could arise if a life insurance trust is already set in place. For those reasons, it is imperative that taxpayers consult with a trusted tax adviser in order to determine what structure would work best for their specific situation.
128. Minimize the income taxes applicable to estates and trusts. The tax rates that apply to estates and trusts continue to be significantly compressed. Estate and trust taxable income (exclusive of long‑term capital gain and qualified dividend income) of more than $13,450 for 2022 is taxed at a marginal tax rate of 37 percent. Consequently, it may be beneficial to distribute income from an estate or trust to the beneficiary for the purpose of shifting the income to a lower tax rate. Additionally, trusts and estates can minimize income taxes by employing many of the tax planning strategies that are applicable to individuals, including the “bunching” of deductions and deferral of income strategies noted above in item 28.
2022 Tax Rates Applicable to Estates and Trusts
Taxable income
Tax rate
$0 – $2,750
$2,751 – $9,850
$9,851 – $13,450
Over $13,450
129. Consider an election under the 65-day rule. Considering the compressed brackets with exceptionally high tax rates on income held within an estate or trust, it is feasible in many scenarios to lessen the total income tax hit for the trust by distributing income to be taxed at the beneficiary level instead of the entity level.
With an election under Section 663(b), complex trust and estate distributions made within the first 65 days of 2023 may be treated as paid and deductible by the trust or estate in 2022. The election of the 65-day rule is an invaluable tactic, giving the trustee flexibility to distribute income after the end of the year, once the total taxable income of the trust can be more accurately determined.
130. Consider private placement life insurance as a hedge fund alternative. Investors with significant income and wealth should consider private placement life insurance (PPLI). This is an unregistered security that typically utilizes strategies associated with alternative investment funds; however such funds are generally subject to high tax rates as many investments are made on shorter time horizons. A PPLI can help reduce the tax cost associated with investment in these funds, as assets can grow in the life insurance policy tax-free. PPLIs may be a particularly attractive alternative for those in states with higher taxes, like New York and California. PPLIs typically require funding of $3 million to $5 million in premiums per year.
Tax Planning Strategies for International Taxpayers (Items 131 to 136)
131. U.S. citizen residents of a foreign country should consider the foreign earned income exclusion. U.S. citizens who spend a significant amount of time out of the country and meet either the physical presence test or bona fide residence test can exclude up to $112,000 of income and some additional housing costs by using the foreign earned income exclusion. Employees and the self-employed can potentially take advantage of this approach. There are several strategies to avoid double taxation for citizens with foreign income, and this approach is ideal for many of those at an income near the exclusion maximum. Your tax adviser can help you determine if you qualify and if this is the best personalized strategy to utilize.
132. Review your foreign bank account balance during 2022 for FBAR preparation. If you have financial interest or signature authority over foreign financial accounts with aggregate balances over $10,000 at any time during 2022, you are required to file FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Willful failure to report these accounts can result in penalties of up to $144,886 or 50 percent of the account value, whichever is greater, on a per account basis (penalties of $14,489 per account apply for omissions deemed nonwillful).
While the reporting of virtual currency was not previously required, the Treasury Department has signaled its intention to amend the disclosure requirements of virtual currency accounts held overseas. FinCen Notice 2020-2 stated that while the current regulations do not define a foreign account holding solely virtual currency as a type of reportable account for FBAR purposes, if the account that holds the virtual currency is an otherwise reportable account, the total holdings must be reported.
Planning Tip—If you are required to file an FBAR, you should also review the filing requirements related to Form 8938, Statement of Specified Foreign Financial Assets. Form 8938, while reporting similar information with respect to foreign financial accounts, has different filing thresholds and slightly different requirements than the FBAR.
133. Review Schedules K-2 and K-3 for businesses with international operations. In 2021, the IRS introduced Schedules K-2 and K-3 to be used by pass-through businesses filing Forms 1065, 1120-S and 8865 to report entity level items of international tax relevance from the operation of a partnership or S corporation. These forms were designed to create more clarity for shareholders and partners on how to calculate their U.S. income tax liability in relation to international deductions, credits and miscellaneous items. Penalties may apply for filing Form 1065, 1120-S and 8865 without all of the required information or for furnishing Schedule K-3 to partners and shareholders without all of the required information.
Observation—In October 2022, the IRS released a draft of Schedules K-2 and K-3 instructions, which provide a new domestic filing exception for tax years beginning in 2022. As currently embodied in the draft instructions, a domestic partnership or S corporation that has no or limited (i.e., the entity has less than $300 of foreign tax withheld on stocks, mutual funds, etc.) foreign activity will likely not have to file Schedules K-2 and K-3 for 2022. This is a welcome change that will relieve compliance burdens for many domestic businesses. Stay tuned for developments when final instructions are issued in early 2023.
134. Be aware of recent regulations issued for international tax. Those with foreign income or holdings should be aware of Section 250, related to foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI), which relaxed certain FDII documentation requirements and expanded the pool of taxpayers eligible for FDII deductions. Last year, significant changes were being considered, however no changes have materialized as of this writing. GILTI and FDII remain an area of interest among legislators and could find renewed interest in a Republican House.
Planning Tip—While the Inflation Reduction Act did not have a direct impact on international taxes, it did create a corporate AMT, which starts with applicable financial statement income (under general accepted accounting principles) and is adjusted for certain items including income from a controlled foreign corporation. For certain large businesses, if there is a controlled foreign corporation in the mix, GILTI income may face a higher tax rate than the standard 10.5 percent rate, due to the AMT.
135. Avoid unintentional foreign trusts. Generally, trusts are considered as domestic trusts for tax purposes if a U.S. court has primary jurisdiction over their administration and one or more U.S. persons have the authority to control all the substantial decisions. Thus, one needs to carefully consider not only where the trust is formed, but also who will control it. A nonresident alien successor trustee, or even a U.S. citizen in the case of assets subject to foreign court jurisdiction, could cause a U.S. trust to become a foreign trust when the original trustee dies or relinquishes their appointment. Along with such reclassification would come substantial changes to U.S. and foreign reporting requirements, as well as having potential state-level implications.
136. Reevaluate transfer-pricing policies in light of supply chain issues and current market conditions. As we have predicted for the last two years, due to the global pandemic, many multinationals have faced severe disruptions to their global supply chains, resulting in new suppliers, temporary options, alternative means of performance, the restructuring of supply contracts and, in some cases, relocation of operations. In addition, recent surges in interest rates and market volatility may necessitate revisiting the terms and conditions of intra-group transactions. Taxpayers may wish to restructure or reprice interest rates in order to maximize available cash flow or defer certain inter-company payments, as well as increase their competitive position when operating in international jurisdictions.
TAG’s Perspective
In a year with significant economic uncertainty due to volatile markets and inflationary pressures, at least we have relatively certain tax laws to enable effective and efficient tax planning. While the Inflation Reduction Act provided a few energy credits to take advantage of, the biggest impact for many taxpayers will be the significant increases to the IRS’ enforcement budget. Taxpayers should ensure that they maintain adequate records and plan for any potential audit scenarios. As year-end plans are developed, caution should be exercised. While many of the 2022 tax savings opportunities will disappear after December 31, 2022, strategies should not be adopted hastily. However, with careful consideration and by investing a little time in tax planning before year-end, you can both improve your 2022 tax situation and establish future tax savings. Without action, however, you may only discover tax saving opportunities when your tax return is being prepared—at which time it may be too late.
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