How to Prepare

As we approach the end of the year, there may be opportunities for you to improve your tax situation. Effective tax planning can help reduce income taxes for current and future years. The outline below highlights some of these tax saving opportunities. These items apply for federal tax purposes and the state tax treatment could differ. If you would like to discuss any of these opportunities please reach out to your local team of CPA’s and accounting professionals, we are ready to assist!

Contribute the Max to Retirement Accounts

Try to increase your 401(k) contributions so that you are putting in the maximum amount allowed ($20,500 for 2022, $27,000 if you are age 50 or over). Or, at least contribute the amount that will be matched by your employer. Pre-tax contributions reduce your taxable wages.

Also consider contributing to an IRA. You have until April 18, 2023, to make your IRA contribution for 2022. Making a deductible IRA contribution will reduce your taxable income for the year. You can contribute a maximum of $6,000 for 2022, plus an additional $1,000 if you are 50 or over.

Offset Capital Gains

Consider examining your portfolio for stocks that you could sell that would produce a tax loss to offset your capital gains. Short-term capital gains are taxed at ordinary income tax rates, so harvesting losses to shelter short-term capital gains recognized this year can be a smart tax move. If your capital losses exceed your capital gains, you are allowed a capital loss deduction up to $3,000 and can carry over the excess losses to future years.

Withholding and Estimated Taxes

If you expect a large increase in income before the end of the year or had major employment or life changes, consider adjusting your withholding or estimated tax payments. If you do not pay in enough, you may have an unexpected bill when you file your income tax return. Penalties for underpayment of tax could be assessed for taxpayers who do not pay enough tax throughout the year.

Donate to Charity

Donations to a qualified charitable organization can be deducted, subject to certain percentage limitations, if you itemize deductions. With the increased standard deduction, you may not itemize each year. Using a bunching strategy to stack contributions into one tax year can maximize the tax impact of your donations.

Business Considerations

100% Business Meals Expense Deduction

A temporary exception to the business deduction for food and beverages has been increased to 100% for amounts paid to restaurants from January 1, 2021 through December 31, 2022. The 50% limitation for business meals still applies to food and beverages purchased from other establishments such as a grocery store or convenience store.

Health Insurance for >2% S-Corp Shareholders

If you are a >2% owner of an S corporation and the business has paid for your health insurance or reimbursed you for the cost, make sure the cost is included on your W-2. If the health insurance is not included on your W-2, it will be treated as an itemized deduction subject to the 7.5% of AGI limitation which can limit or eliminate the deduction.

Purchase Business Assets

With bonus depreciation at 100 percent and increased limits for Section 179 expensing, you can expense the entire cost of most assets you buy and place in service before December 31, 2022. Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, and furniture. The bonus depreciation percentage will be phased down by 20 percent per calendar year for property placed in service after 2022.

Business Retirement Plans

One of the best ways for small businesses to reduce their taxes is to set up a retirement plan. Businesses may be able to lower their taxable income by funding qualified retirement savings plans. Additionally, tax credits may be available for certain businesses.

Home Office Deduction

You may be eligible for the home office deduction which can help reduce your taxes for housing expenses that you are already incurring. You must regularly use part of your home exclusively for conducting business and your home should be your principal place of business.

Don’t Assume You Are Taking Too Many Deductions

If your allowable business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL. If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business. You can carry 2022 NOLs forward to future years, creating a benefit to your business in the form of future tax liability savings.

What does all this mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions.

Review How Your Business is Set Up

As your business and income grows, the best form of tax structure for your business may change. We can help you review your tax structure and evaluate the short-term and long-term considerations to help you determine if converting the tax structure of your business makes sense.

Additional Considerations

Donations to Charity

You can no longer deduct cash donations if you take the standard deduction. The temporary expanded limits on charitable deductions expired after 2021. In order to take a charitable deduction, you must itemize your deductions.

Child Tax Credit

The child tax credit is back to previous amounts for 2022. The maximum credit is $2,000 for each qualifying child under the age of 17 and $500 for any other dependent.

Child and Dependent Care Credit

The child and dependent care credit is back to previous amounts for 2022. The credit is 35 percent of up to $3,000 of qualifying expenses for one qualifying individual, or up to $6,000 of qualifying expenses for two or more qualifying individuals. The credit percentage is reduced based on your AGI and is nonrefundable. 

Summary & Final Thoughts

We know that some of the above considerations can be confusing and may be difficult to navigate. If we can be of further assistance, please do not hesitate to call us at 808.529.9990. Our experienced team of Certified Public Accountants (CPA) and Tax Professionals can help you and your business take advantage of all available opportunities! 

Aloha,
The HiAccounting Team