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Single

DEDUCTION AMOUNT:
$12,950

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Married Filing Jointly

DEDUCTION AMOUNT:
$25,900

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Head of Household

DEDUCTION AMOUNT:
$19,400

2022 Tax Brackets and Rates

Taxable Income Over

Rate Single Married Filing Jointly Head of Household
10% $0 $0 $0
12% $10,275 $20,550 $14,650
22% $41,775 $83,550 $55,900
24% $89,075 $178,150 $89,050
32% $170,050 $340,100 $170,050
35% $215,950 $431,900 $215,950
37% $539,900 $647,850 $539,900

2022 Long-Term Capital Gains Tax Bracket

Taxable Income (Including Capital Gains) Over

Rate Single Married Filing Jointly Head of Household
0% $41,675 $83,350 $55,800
15% $41,676 – $459,750 $83,351 – $517,200 $55,801 – $488,500
20% $459,750 $517,200 $488,500

Year-End Tax Strategies for Individuals

Caution: As of the date of this publication, the “Inflation Reduction Act” (IRA) has been enacted into law. Most of the income tax proposals in the 2021 “Build Back Better” bill did not make it into the IRA.

General Income Tax Planning

  • Postpone income until 2023 and accelerate deductions into 2022.
    • Doing so may enable you to claim larger deductions, credits, and other tax breaks for 2022 that are phased out over varying levels of adjusted gross income (AGI).
    • Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
  • Long-term capital gain from sales of assets held for more than one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term, appreciated capital assets, consider selling enough of them to generate long-term capital gain sheltered by the 0% rate, if applicable.
  • The 3.8% net investment income (NII) tax will apply depending on a taxpayer’s modified adjusted gross income (MAGI) and NII for the year. Taxpayers should consider ways to minimize or eliminate (e.g., through deferral) additional NII for the balance of the year, while others should try to see if they can reduce MAGI other than NII.
  • The 0.9% additional Medicare tax applies to individuals for whom the sum of their wages received with respect to employment and/or self- employment income exceeds a threshold amount ($250,000 for joint filers, $125,000 for married filing separately, and $200,000 in other cases). Employers must withhold the additional Medicare tax from wages in excess of $200,000, regardless of filing status or other income. Thus, planning opportunities may exist with respect to eliminating this tax by deferring income to a later year.
  • Consider asking your employer to increase withholding of state and local taxes (or you can pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2022. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2022 state and local tax payments to exceed $10,000.
  • Consider relocating your residency and domicile for the purpose of reducing or eliminating individual state taxation. For example, common states where people move to reduce state taxes are Florida, Texas, Wyoming, and Nevada.
  • Consider increasing the amount you set aside for next year in your employer’s health flexible spending account (FSA).
  • If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2022 to maximize your casualty loss deduction. Confirmation regarding whether the damaged area is categorized by the IRS as a federal casualty loss or qualified disaster loss is important to avoid the 10% AGI limitation. A taxpayer can make an election to deduct a disaster loss in a federally declared disaster area for the year before the year in which the loss occurs is made on an original return or amended return for the preceding year. So, a calendar-year taxpayer who suffers a disaster loss in 2022 has until October 16, 2023 (because October 15 is a Sunday), to file an original or amended 2021 return to deduct the loss for 2021.

Capital Gain Planning

  • Should I sell stocks/bonds now or wait for the new year? Capital gain rates are always top of mind, especially for those with substantial unrealized gains or business owners looking to sell their businesses. An increase in capital gain rates, even by a few percentage points, could make the difference between selling now or later.
  • With the volatility of the market many have seen a decrease in the value of their stocks. If there is a decision to sell in the 2022 taxable year, individuals should remember that capital losses can be utilized to offset capital gains but then is limited to an additional $3,000 of ordinary income.
  • While individuals might be motivated to sell stock during the 2022 taxable year to capture the capital loss and purchase the same stock at a lower cost, the wash-sale rule could apply. The wash-sale rule prohibits selling an investment for a loss and replacing it with the same or a "substantially identical" investment 30 days before or after the sale. If you do have a wash-sale, the loss will be deferred until the replacement investment is sold.

Estate Tax Planning

To give or not to give? The estate tax is once again becoming a hot button issue even with the lifetime exemption currently set at $12.06 million per person (and $12.92 million in 2023). The question is whether any gift given now that uses up the exemption will be grandfathered if there is a future reduction in the exemption amount. The IRS has issued favorable regulations preventing a claw back provision unless the taxpayer retained a significant amount of control after the transfer. If you have not done so already and are comfortable surrendering control of assets to the next generation, it might be a good idea to take advantage of the $12.06 million per individual lifetime exemption in 2022, or $24.12 million for a married couple.

Tax-Advantaged Accounts

  • It may make sense to convert all or part of your eligible retirement accounts (e.g., traditional IRA) to a Roth IRA before year-end. However, such a conversion will increase your AGI for 2022, and possibly reduce tax breaks that are tied to AGI (or MAGI).
  • Consider taking versus delaying required minimum distributions (RMDs) from your IRA or 401(k) (or other employer-sponsored retirement plan).
  • The IRS announced it will not impose penalties on failures to take specified RMDs for the 2022 taxable year in relation to inherited IRAs.

Charitable Gifting

  • Consider bunching charitable deductions in the current year, and making contributions to a donor-advised fund, so you increase your charitable deduction and therefore your itemized deductions fall above the standard deduction. The benefit on a donor-advised fund is that you can deduct the charitable contribution this year and allocate charitable funds from the donor-advised fund to individual charities in later years.
  • Make gifts sheltered by the annual gift tax exclusion before the end of the year. The exclusion applies to gifts of up to $16,000 made in 2022 to each of an unlimited number of individuals. The annual exclusion increases to $17,000 in 2023.
  • Consider making 2022 charitable donations via qualified charitable distributions from an IRA. When you reach age 70½, the amount of the contribution is neither included in your gross income nor deductible as an itemized deduction and the amount of the qualified charitable distribution reduces the amount of your RMD, which can result in tax savings.
  • In 2021, individuals were able to make cash contribution up to 100% of their AGI; in 2022, the percentage is decreased to 60%.
  • The ability to take an above-the-line $300 charitable contribution deduction (or an aggregate $600 for joint filers) is not available in 2022.

QBI Deduction

  • Businesses operating as sole proprietorships, partnerships, S corporations, and some trusts and estates may be entitled to a deduction of up to 20% of their qualified business income (QBI). If a qualifying taxpayer’s taxable income exceeds a threshold amount, then the deduction may be limited based on: whether the taxpayer is engaged in a service-type trade or business (SSTB, such as law, accounting, health, or consulting); the amount of W-2 wages paid by the trade or business; and the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.
  • Taxpayers may be able to achieve significant savings with respect to this deduction by deferring income or accelerating deductions to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2022. Depending on their business model, taxpayers also may be able to increase the new deduction by increasing W-2 wages before year-end.
2022 Year-End Tax Planning Resources

Withum’s Year-End Tax Planning Resource Center is a one-stop-shop for annual tax planning tips for individuals and businesses, legislative and regulatory changes, COVID impacts and other tax-saving opportunities.

SALT Deduction Limitation Workaround

  • Several states have passed legislation to circumvent the $10,000 state and local tax (SALT) deduction limitation (29 states in total including NJ and NY). In addition, New York City is allowing eligible entities to circumvent the SALT deduction limitation for taxable years beginning on or after January 1, 2022.
  • The IRS has confirmed that pass-through entity tax (PTET) elections are effective workarounds the SALT deduction limitation and allow a business to fully deduct state and local taxes from the entity’s taxable income.

State Tax Credits

States offer various tax credits and incentive programs aimed at attracting businesses and stimulating investment and retaining businesses currently operating within their borders.

Determining the best market for your business to incorporate and/or operate is a critical decision — do not overlook the tax credits and incentives that may be available.

Common opportunities from states and/or localities may target:

  • Small and mid-size businesses
  • Innovative businesses
  • Job creation
  • Capital investments
  • Angel investors
  • Specifically targeted industries, such as technology, manufacturing, agriculture, or film
  • Geography, such as distressed zones, enterprise zones, or tax-increment finance districts
  • Energy credits
  • Not-for-profits

Contact a member of Withum’s Tax Services Team to start planning as year-end approaches.


Year-End Tax Planning for Businesses

The corporate tax rate is currently a flat 21% rate. The IRA includes a 15% corporate alternative minimum tax (CAMT) based on book income for companies with average annual adjusted financial statement income exceeding $1 billion.

Limits on Deduction of Business Interest

Every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income (ATI). The net interest expense disallowance is determined at the tax filer level; however, a special rule applies to pass-through entities, which requires the determination to be made at the entity level, for example, at the partnership level instead of at the partner level.

  • For 2022, ATI generally is computed without regard to deductions allowable for depreciation, amortization, or depletion. This is a significant change from 2021 and will cause many entities that previously did not have a 163(j)-interest limitation to have one in 2022 because of the expanded definition of ATI.
  • Exemptions from the limitation on business interest deductions:
    • An election to be excepted from these rules applies for taxpayers (other than tax shelters) with average annual gross receipts for the three-tax year period ending with the prior tax year that do not exceed $27 million.
    • Real property trades or businesses can elect out of the provision, but they must use ADS to depreciate property with a 15-year class life or more (and ADS generally has longer recovery periods than MACRS). Any asset with a class life of less than 15-years can still be depreciated using MACRS and take advantage of bonus depreciation.
    • An exception from the limitation on the business interest deductions is also provided for floor plan financing (i.e., financing for the acquisition of motor vehicles, boats, or farm machinery for sale or lease and secured by such inventory).
  • Expansion of small businesses that are able to use the cash (as opposed to accrual) method of tax accounting. To qualify as a small business, a taxpayer must, among other things, satisfy a gross receipts test. For the 2022 taxable year, the gross receipts test is met if using the preceding three-year testing period, the average annual gross receipts do not exceed $27 million. This amount increases to $29,000,000 for the 2023 taxable year. Cash method taxpayers may find it easier to shift income between tax years, e.g., by deferring billings until next year or by accelerating expenses such as paying bills early.

NOTE: If a taxpayer can meet the small business gross receipts test, other advantages could include no longer be required to follow UNICAP, being allowed to utilize a simplified method to track inventory, and not being required to utilize the percentage for completion method for long-term contracts. Please discuss with your Withum Tax advisor.

  • Consider making expenditures that qualify for the liberalized business property expensing option.
    • For 2022, the expensing limit is $1,080,000, and the phase-out starts at $2,700,000. This means there is a dollar-for-dollar reduction in the expensing limit after spending exceeds $2,700,000, and the entire deduction would disappear when spending reaches $3,780,000. Bonus depreciation generally can still be taken after the spending cap is reached.
    • Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, and business-use vehicles (though restrictions apply).
    • Expensing is also available for “qualified improvement property” (generally, any interior improvement to a building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), as well as roofs, HVAC, fire protection, alarm, and security systems.
    • The expensing deduction is not prorated for the time that the asset is in service during the year. Thus, property acquired and placed in service in the last days of 2022, rather than at the beginning of 2022, can result in a full expensing deduction for 2022.
  • 100% Bonus First-Year Depreciation – Businesses are permitted a deduction for machinery and equipment bought new or used (with some exceptions) if such purchases are placed in service this year. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2022. In 2023 bonus depreciation will decrease to 80% and continue to decrease 20% in each of the following years until bonus depreciation is no longer allowed in the 2027 taxable year. It is important to consider this significant change when analyzing purchases.
  • De Minimis Safe Harbor Election – Also known as the book-tax conformity election, this election is an administrative convenience that allows businesses to deduct small-dollar (i.e., up to $2,500 or $5,000 per invoice) expenditures for the acquisition or production of property that otherwise would have to be capitalized, other than amounts paid for inventory or land.
  • Cost Segregation Benefits – Cost segregation is a strategic tax savings tool that allows companies and individuals who have purchased, constructed, expanded, or remodeled any kind of real estate to immediately increase their cash-flow by accelerating their depreciation deductions and deferring their Federal and State income taxes. Cost segregation is recognized as an engineering-based tax study accepted by the IRS. The primary goal of cost segregation is to identify, segregate, and reclassify the various building-related assets from either nonresidential real property (39 years) or residential rental property (27.5 years) to a shorter depreciable tax life (e.g., 3, 5, 7, 15, or 20 years). The reclassification of these assets into the shorter depreciable tax lives allows you to take an immediate deduction (100% bonus depreciation) in 2022. However, remember that the 100% bonus depreciation will be reduced by 20% in each year starting in 2023. Therefore, if you are planning any type of real estate transaction… the time is now to pull the trigger!

    Other cost segregation services include:
    • Look-back studies to recapture depreciation deductions from prior tax years without amending your tax return
    • Repair and maintenance studies
    • Section 179D studies relating to energy-efficient commercial buildings
    • Purchase price allocation studies
  • Income Acceleration – Certain corporations (other than large corporations) that anticipate a small net operating loss (NOL) for 2022 and substantial net income in 2023 may find it worthwhile to accelerate just enough of their 2023 income (or to defer just enough of their 2022 deductions) to create a small amount of net income for 2022. This will permit the corporation to base its 2023 estimated income tax installment payments on the relatively small amount of income shown on its 2022 tax return, rather than having to pay estimated taxes based on 100% of its much larger 2023 taxable income.
    • Consider whether to elect into bonus depreciation for the 2022 taxable year
    • To reduce 2022 taxable income, consider deferring a debt cancellation event until 2023
    • To reduce 2022 taxable income, consider disposing of a passive activity in 2022 if doing so will allow you to deduct suspended passive activity losses
  • Employee Retention Tax Credit – Employers who experienced a 50% or greater reduction in gross receipts in the last three quarters of 2020 relative to the same quarters in 2019, or a 20% or greater reduction in gross receipts in the first three calendar quarters in 2021 relative to the same quarters in 2019, may be eligible to claim an employee retention credit (ERC). The credit amount is a maximum of up to $5,000 per employee for the 2020 taxable year, and up to $7,000 per employee per quarter in the first three calendar quarters of 2021. In addition to the gross receipts decline, an employer can also claim the ERC if it was subject to a governmental order that limited its travel, commerce, or group meetings due to COVID-19.
  • ERC Recovery Startup Business – Businesses who started on or after February 15, 2020 can receive an ERC of up to $50,000 for each of Q3 & Q4 2021 (max credit of $100,000 for 2021). These businesses do not need to meet the gross receipts test or the suspension of operations test in order to qualify.
  • Section 1202 Stock – For certain C corporations satisfying an active trade or business requirement, shareholders that hold original issuance stock for more than five years can be eligible to have gain on the sale of such stock excluded from tax to the extent of the greater of $10 million or 10 times their original tax basis.
  • Research and Development Expenses – Starting in 2022, companies are required to amortize their R&D costs over five years (fifteen years for research conducted outside the U.S.), instead of deducting them immediately each year. This change will require companies to further analyze what costs would fall under §174 for the deduction, which generally is a more expansive list than the types of expenses included in the R&D credit under §41. Tax professionals are closely monitoring Congress to see if a year-end bill can pass that would allow R&D to remain fully deductible.
  • 1% Stock Buyback Excise Tax – The IRA included a new provision requiring covered corporations to pay a 1% tax on the fair market value of any corporate stock that is redeemed after December 31, 2022. A covered corporation is a domestic corporation that has stock traded on an established securities market. Based on the current language, the definition of a covered corporation could have an unexpected application to domestic special purpose acquisition companies (SPACs). Tax professionals have requested additional guidance from the IRS on the intended application of this new law.

Modified or New Energy Credits

The IRA extended and modified nine existing federal credits and introduced eight new federal credit opportunities. The IRA also included a direct pay option for not-for-profit entities and governmental agencies for many of the credits. The direct pay option effectively treats the credit as an amount paid to the federal government, that will ultimately be refunded to the entity even if there is no federal tax liability. Also new is the ability of for-profit entities to transfer their credits for cash without having to recognize taxable income.

Some of the credit highlights include:

  • Qualified Commercial Clean Vehicles (New): A credit can be claimed for clean vehicle purchases between 2023 and 2032 for an amount not exceeding $7,500 per vehicle (with a gross vehicle less than 14,000 pounds) or $40,000 (for all other vehicles).
  • Alternative Fuel Vehicle Refueling Property/Charing Stations (Modified): A credit can be claimed up to 30% of the cost basis for qualified clean-fuel vehicle refueling property. The maximum credit increased from $30,000 to $100,000 and is now applied on a per-property basis under the modified law (as opposed to per project).
  • Contractor Energy Efficient Home Credit (Modified): The maximum credit allowable to contractors for the construction of new energy-efficient homes was increased from $2,000 to $5,000. In addition, the law was modified to allow a credit for the construction of multifamily new construction, with a maximum credit of $5,000 provided.
  • Energy Tax Credit (Modified): The credit was extended to energy projects that begin construction before January 1, 2025, and the list of energy projects that qualify was expanded. Solar energy projects, qualified small wind energy projects, and qualified fuel cell properties are still viable, but energy projects were also expanded to include energy storage technology, qualified biogas property, and microgrid controllers. In addition, the credit obtainable can be as high as 50% of the cost basis if the prevailing wage and apprenticeship, domestic content, and energy community requirements are met.
  • Energy Efficient Commercial Buildings Deduction - §179D (modified): If §179D is utilized, a taxpayer may receive an immediate deduction of costs related to energy-efficient commercial building property even though the costs otherwise would be capitalized and depreciated up to 39 years. Under the new law, the amount of the deduction was raised from $1.88 to $5 per square foot for taxable years starting after December 31, 2022. Energy-efficient improvements could include adjustments to the interior lighting systems, hot water systems, the building envelope, and heating, cooling, and ventilation systems.
  • Advanced Manufacturing Production Tax Credit (new): The IRS provides a new credit for eligible components related to solar energy, wind, inverters, qualifying batteries, and applicable critical minerals if produced in the U.S. The amount of the credit varies based on the component being manufactured. For-profit businesses can elect for this credit to be refundable over a five-year period, even when no federal tax liability exists (i.e., start-up companies).

Contact Us

For more information on this topic, reach out to Withum’s Tax Services Team to discuss your individual situation as year-end approaches.

Disclaimer: No action should be taken without advice from a member of Withum’s Tax Services Team because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities.