2022 Individual Planning Guide
With rising interest rates, inflation and continuing market volatility, tax planning for yourself and your household can ensure a smooth transition from 2022 to 2023.
Now is the time to review your taxes and identify opportunities for reducing, deferring or accelerating your tax obligations. Here are some tips to get you started.
2022 Federal Income Tax Rate Brackets
Tax Rate Joint/Surviving Spouse Single Head of Household Married Filing Separately Estates & Trusts
10% $0 – $20,550 $0 – $10,275 $0 – $14,650 $0 – $10,275 $0 – $2,750
12% $20,551– $83,550 $10,276–$41,775 $14,651–$55,900 $10,276–$41,775
22% $83,551–$178,150 $41,776–$89,075 $55,901–$89,050 $41,776–$89,075
24% $178,151–$340,100 $89,076– $170,050 $89,051– $170,050 $89,076–$170,050 $2,751–$9,850
32% $340,101–$431,900 $170,051– $215,950 $170,051– $215,950 $170,051–$215,950
35% $431,901–$647,850 $215,951– $539,900 $215,951– $539,900 $215,951–$323,925 $9,851– $13,450
37% Over $647,850 Over $539,900 Over $539,900 Over $323,925 Over $13,450
Timing of Income and Deductions
Taxpayers should consider whether they can minimize their tax bills by shifting income or deductions between 2022 and 2023. Ideally, income should be received in the year with the lower marginal tax rate, and deductible expenses should be paid in the year with the higher marginal tax rate.
Actions to consider that may result in a reduction or deferral of taxes from 2022 to 2023 include:
- Delaying closing capital gain transactions until after year end or structuring 2022 transactions as installment sales so that gain is deferred past 2022 (also see Long Term Capital Gains, below).
- Considering whether to trigger capital losses before the end of 2022 to offset 2022 capital gains.
- Delaying interest or dividend payments from closely held corporations to individual business-owner taxpayers.
- Deferring commission income by closing sales in early 2023 instead of late 2022.
- Accelerating deductions for expenses such as mortgage interest and charitable donations (including donations of appreciated property) into 2022 (subject to AGI limitations).
- Evaluating whether non-business bad debts are worthless by the end of 2022 and should be recognized as a short-term capital loss.
- Shifting investments to municipal bonds or investments that do not pay dividends to reduce taxable income in future years.
On the other hand, taxpayers that will be in a higher tax bracket in 2023 may want to consider potential ways to move taxable income from 2023 into 2022, such that the taxable income is taxed at a lower tax rate. In these cases, current year actions to consider that could reduce 2023 taxes include:
- Accelerating capital gains into 2022 or deferring capital losses until 2023.
- Electing out of the installment sale method for 2022 installment sales.
- Deferring deductions such as large charitable contributions to 2023.
Long-Term Capital Gains
The long-term capital gains rates for 2022 are shown below. The tax brackets refer to the taxpayer’s taxable income. Capital gains also may be subject to the 3.8% Net Investment Income Tax.
2022 Long-Term Capital Gains Rate Brackets
Tax Rate Joint/Surviving Spouse Single Head of Household Married Filing Separately Estates & Trusts
0% $0 – $83,350 $0 – $41,675 $0 – $55,800 $0 – $41,675 $0 – $2,800
15% $83,351– $517,200 $41,676– $459,750 $55,801– $488,500 $41,676– $258,600 $2,801– $13,700
20% Over $517,200 Over $459,750 Over $488,500 Over $258,600 Over $13,700
Long-term capital gains (and qualified dividends) are subject to a lower tax rate than other types of income. Investors should consider the following when planning for capital gains:
- Holding capital assets for more than a year (more than three years for assets attributable to carried interests) so that the gain upon disposition qualifies for the lower long-term capital gains rate.
- Considering long-term deferral strategies for capital gains such as reinvesting capital gains into designated qualified opportunity zones.
- Investing in, and holding, “qualified small business stock” for at least five years.
- Donating appreciated property to a qualified charity to avoid long term capital gains tax.
Net Investment Income Tax
An additional 3.8% net investment income tax (NIIT) applies on net investment income above certain thresholds. Net investment income does not apply to income derived in the ordinary course of a trade or business in which the taxpayer materially participates. Similarly, gain on the disposition of trade or business assets attributable to an activity in which the taxpayer materially participates is not subject to the NIIT.
In conjunction with other tax planning strategies that are being implemented to reduce income tax or capital gains tax, impacted taxpayers may want to consider deferring net investment income for the year.
The surtax is 3.8% of the lesser of:
- Net investment income (NII), or
- The excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for married filing joint or surviving spouse, $125,000 for married filing separate, and $200,000 in any other case).
Social Security Tax
The Old-Age, Survivors, and Disability Insurance (OASDI) program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee’s gross pay, but only on wages up to $147,000 for 2022. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses.
Employers, employees, and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%. An extra 0.9% Medicare (HI) payroll tax must be paid by individual taxpayers on earned income that is above certain adjusted gross income (AGI) thresholds, i.e., $200,000 for individuals, $250,000 for married couples filing jointly and $125,000 for married couples filing separately. However, employers do not pay this extra tax.
Retirement Plan Contributions
Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs).
- The maximum amount of elective contributions that an employee can make in 2022 to a 401(k) or 403(b) plan is $20,500 ($27,000 if age 50 or over and the plan allows “catch up” contributions). For 2023, these limits are $22,500 and $30,000, respectively.
- Individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½.
- The age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs is 72 for individuals born on or after July 1, 1949. Generally, the first RMD for such individuals is due by April 1 of the year after the year in which they turn 72.
- Individuals age 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA. The amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040.
- IRS rules generally requires that designated beneficiaries of persons who died after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts.
- If eligible to do so, consider converting traditional-IRA money into a Roth IRA.
- Keep in mind, however, that such a conversion will increase your AGI for 2022.
Itemized Deductions
Many taxpayers will not be able to itemize because of the high basic standard deduction amounts that apply for 2022 (single and married filing separately $12,950, married filing jointly $25,900, head of household $19,400). Additionally, many itemized deductions have been reduced or abolished.
- No more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (i.e., tax preparation fees and unreimbursed employee expenses) are not deductible.
- Medical expenses may be itemized if they exceed 7.5% of your adjusted gross income.
- Payments of the above items will not save taxes if they do not cumulatively exceed the standard deduction for your filing status.
- Cash contributions made to qualifying charitable organizations, including donor advised funds, in 2022 and 2023 will be subject to a 60% AGI limitation. The limitations for noncash contributions continue to be 30% of AGI. Tax planning around charitable contributions may include:
- Creating and funding a private foundation, donor advised fund or charitable remainder trust.
- Donating appreciated property to a qualified charity to avoid long term capital gains tax.
Kiddie Tax
The unearned income of a child is taxed at the parents’ tax rates if those rates are higher than the child’s tax rate.
Estate and Gift Taxes
The gift tax annual exclusion is $16,000 for 2022 and is $17,000 for 2023. For 2022, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $12,060,000 per person. For 2023, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $12,920,000. Tax planning strategies may include:
- Making annual exclusion gifts.
- Making larger gifts to the next generation, either outright or in trust.
Net Operating Losses and Excess Business Loss Limitation
Net operating losses (NOLs) generated in 2022 are limited to 80% of taxable income and are not permitted to be carried back. Any unused NOLs are carried forward subject to the 80% of taxable income limitation in carryforward years.
A non-corporate taxpayer may deduct net business losses of up to $270,000 ($540,000 for joint filers) in 2022. A disallowed excess business loss (EBL) is treated as an NOL carryforward in the subsequent year, subject to the NOL rules. With the passage of the Inflation Reduction Act, the EBL limitation has been extended through the end of 2028.
Foreign Bank Account Reporting
The IRS has become increasingly aggressive at tracking down individuals who have not reported foreign bank accounts. If you have an interest in a foreign bank account, it must be disclosed. Failure to do so carries stiff penalties.
You must file a Report of Foreign Bank and Financial Accounts (FBAR) if:
- You are a U.S. resident or a person doing business in the United States;
- You had one or more financial account that exceeded $10,000 during the calendar year;
- The financial account was in a foreign country; and
- You had a financial interest in the account or signatory or other authority over the foreign financial account.
These are just some of the year-end tax planning strategies that could potentially benefit you. Please contact us if you have questions, want more information, or would like us to assist with year-end planning.
Sincerely,
WellsColeman
5004 Monument Ave
Richmond, VA 23230
T: 804.249.3328