Tax planning season is upon us and as year-end approaches, individuals should review their 2022 tax situations to identify opportunities to reduce or defer their tax obligations.
While the federal income tax rates for individuals have not changed for 2022 and 2023, the individual brackets have been adjusted for inflation. Market volatility, rising interest rates, and inflation may impact tax planning and managing cash flow. All of these factors, in conjunction with the outcome of the November mid-term elections, will shape the future of tax policy and planning.
Below are key areas individuals should consider as they make strategic decisions about their tax obligations for 2022 and beyond.
Timing of Deductions and Income
Taxpayers should consider whether they can shift income and deductions between 2022 and 2023. This is significant due to the inflation-adjusted 2023 tax bracket increases of around seven percent. In 2023, the highest tax rate of 37 percent will apply to married filing jointly taxpayers earning $693,750, up from $647,850 in 2022. $45,900 of income can be taxed in 2023 at the lower rate of 35 percent.
In a year taxpayers have a higher marginal tax rate, deductible expenses should be paid; in a year with a lower rate, income could be accelerated.
Long-Term Capital Gains
Long term capital gains and qualified dividends are subject to a lower tax rate between zero and 20 percent, plus 3.8 percent for the Net Investment Income Tax. In 2022, the 20 percent rate is based upon the married filing joint threshold of $517,200. In 2023, that threshold will increase to $553,850, which is a change of almost $37,000.
Taxpayers can wait to close capital gain transactions after year-end or structure 2022 sales as installment sales to defer part of the gain past 2022. Consideration can be given to trigger capital losses in 2022 to offset 2022 capital gains.
On the other hand, if a taxpayer knows their 2023 tax bracket will be higher than 2022, capital gains could be accelerated into 2022 and capital losses can be deferred until 2023.
Cash contributions made in 2022 and 2023 to qualifying charitable organizations, including donor-advised funds, will be subject to a 60 percent Adjusted Gross Income (AGI) limitation.
Individuals 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA. This will result in neither taxable income nor a charitable deduction.
Net Operating Losses
The Tax Cuts and Jobs Act (TCJA) modified the treatment of net operating losses (NOLs). NOLs generated in 2022 are limited to 80 percent of taxable income and are not permitted to be carried back. Any unused NOLs are carried forward and subject to the 80 percent of taxable income limitation.
Excess Business Loss Limitation
The excess business loss limitation was part of the Tax Cuts and Jobs Act (TCJA) and temporarily suspended as part of the pandemic but is back in 2022. Any individual may deduct net business losses up to $540,000 in 2022 and $578,000 in 2023 for taxpayers married filing jointly, or $270,000 and $289,000, respectively, for single filers. Any loss in excess of the limitation is treated as an NOL and carried forward subject to the rules above.
Retirement Plan Contributions
The maximum contribution to a 401(k) or 403(b) plan in 2022 is $20,500. For individuals over age 50 the maximum contribution is $27,000 and a catch-up contribution is allowed. For 2023, the limits are $22,500 and $30,000, respectively.
In 2020, the IRS began allowing individuals to contribute to their traditional individual retirement account (IRA) after the year in which they turn 70 ½; previously, contributions had to cease by that age. Beginning at age 72, individuals must begin to take required minimum distributions (RMDs), the first of which must occur by April 1st of the year after turning 72.
While temporarily on the chopping block in early drafts of the Build Back Better Act, backdoor Roth IRAs are still an option in 2022. Roth IRA income limits are $214,000 in 2022 for married filing jointly taxpayers and $228,000 in 2023. The backdoor Roth allows taxpayers to contribute up to $6,000 to a traditional IRA and then convert to a Roth without being subject to the income limitations.
The above highlights are only a sliver of tax planning considerations for 2022 and beyond. For more information on tax planning strategies, click here to watch the rebroadcast from our recent 2022 Client Tax Planning Seminar.