2022 is coming to an end, which means tax season is right around the corner. While you might be busy planning for the upcoming holidays, we at Sciarabba Walker want to help you prepare for tax filing by sharing some updates and strategies with you.
Help Us Help You
While we pride ourselves in being a firm focused on serving the evolving needs of our clients, we can only know our client’s needs when they are communicated. We don’t know precisely how to provide you with the best service unless we know as many details as possible. The best way you can prepare for this upcoming tax season is to fill out the client organizer as completely as possible and to provide us with your information as timely as possible. Doing so can allow us to provide you with the quality of service that you deserve.
Updates from 2022
2022 saw some activity from our government officials that could impact your taxes for 2022 and beyond. The Inflation Reduction Act of 2022 was passed in August, which, for the most part, saw an extension and expansion of clean-energy related tax credits for taxpayers, most of them taking effect for tax year 2023. And while it has been temporarily paused, President Biden also laid out a plan involving student loan forgiveness, which you can find more information about on our page here. More delegation was conducted on bills, collectively known as SECURE Act 2.0, which would impact individuals’ retirement accounts. Still, nothing is scheduled to affect 2022 tax year filings.
Tax Rates and Withholding
The seven marginal tax rates remain the same in 2022 as in 2021. They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, while the income brackets separating each rate have increased with inflation and are still dependent on your filing status. This would be a good time to double-check and ensure your tax withholding or estimated payments look appropriate according to your expected tax before year-end. Suppose you had any significant increase in anticipated income. In that case, you can still adjust the taxes withheld from your wages before year-end or adjust your final estimated payment before its due date. As a reminder, the final estimated tax payment due date for your 2022 tax return is January 17th, 2023. If you wish to include your state estimated tax payment on the 2022 tax return for itemization purposes, you would need to make that state estimated payment before year-end.
Ensuring accurate withholding and estimated payments are essential to avoid underpayment penalties. A larger estimated tax payment at the end of the year can still expose you to penalties for underpayments in previous quarters, but withholding is considered to have been paid ratably throughout the year, so increasing it for year-end wages can save you in penalties.
Standard Deduction vs. Itemized Deduction
The standard deduction increases in 2022 to $25,900 for taxpayers who are married and filing jointly, $19,400 for taxpayers who are filing as heads of households, and $12,950 for taxpayers who are single or married and filing separately. No longer will there be a charitable deduction allowed if you take a standard deduction. If you wish to take a charitable deduction, you must now take the itemized deduction.
If your itemized deductions exceed the standard deduction, it might be more beneficial to itemize your deductions rather than take the standard deduction. Itemized deductions still have a $10,000 limitation on state and local taxes, and medical expenses can be taken when they exceed 7.5% of your Adjusted Gross Income (AGI). Charitable cash contributions can be taken up to 60% of your AGI, and non-cash donations are typically limited to 30% of your AGI. If you find yourself with higher medical expenses, taxes, or contributions for 2022, you may be able to “bunch” additional expenses or contributions before year-end to maximize your allowed itemized deduction. You can “bunch” your itemized deductions when you make a charitable contribution, medical expense, or tax payment in the current year when you would typically do it in the following year. For example, maybe you have a monthly charitable contribution scheduled to give in January of 2023. If you would like to maximize your deduction in the current year, you could make that contribution in December 2022 rather than January. The same can be applied to medical expenses or taxes.
‘Tis the season of giving, and for 2022 the annual gift exclusion limit is $16,000 per person you make a gift to. For spouses of a married filing joint return, the two can combine their exclusion amount in a single gift and give up to $32,000 in one gift per person. These gift exclusions allow you to give gifts, whether in aggregate or at once, to an individual during 2022 up to these amounts without impacting your estate or lifetime gift tax exclusion. While there is a limit on the amount of a gift you can give to one person, there is no limit to how many different individuals you can give gifts to. Whether it be family or friends, you can give gifts to as many individuals as you’d like, up to these limits, without impacting your estate or lifetime gift tax exclusion amount.
End of Temporary Increase to the Child Tax Credit (CTC) and the Child and Dependent Care Tax Credit (CDCTC)
These credits were temporarily increased through 2021 but have now been reduced to the credit amounts used before the 2021 tax year. The CTC is worth up to $2,000 per qualifying child under the age of 17 and $500 for each child 17 years old or older. These credits are phased out when your adjusted gross income exceeds $200,000 or $400,000 if your filing status is married filing joint.
The CDCTC is no longer a refundable credit but may still offset any potential tax liability you may have. The credit allows the taxpayer to include up to $3,000 worth of care expenses paid for one child or $6,000 if the taxpayer has two or more children for whom they pay these expenses. The credit is calculated by taking a certain percentage of these expenses, dependent on the taxpayer’s income, which is then used to reduce their tax liability.
Inflation Reduction Act’s Impact on Your 2022 Tax Planning
The Inflation Reduction Act of 2022 included new and newly expanded tax credits for solar panels, electric vehicles, and energy-efficient home improvements. The rules related to these credits are complex, documentation requirements have increased, and careful analysis is required to determine eligibility for these credits.
With new bills still in the works, we would like our clients to know that Sciarabba Walker is evaluating the possibility of changes to tax policy and will inform our clients if and when changes occur. As always, please stay tuned to our website and follow us on social media for the most up-to-date tips and guidance as it becomes available. Click here to read our business year-end planning guidance for 2022.
We would be happy to assist you with your year-end tax planning or answer any questions. Please reach out to your personal Sciarabba Walker contact or email us at firstname.lastname@example.org at your earliest convenience.
By David Jacobson