Dear Client:

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Rising interest rates, inflation, and continuing market volatility, made 2022 a challenging year for many individuals and small businesses. Recent changes made by the Inflation Reduction Act of 2022 (IRA) and other legislation that may be passed in early 2023 should be considered with regard to any tax planning. The IRA contains a multitude of energy credits, an excise tax on stock repurchases and a new corporate alternative minimum tax (AMT).

 

Following are considerations for both individuals and small businesses:

 

Individuals:

 

• Net investment income tax. Higher-income individuals may be subject to the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). An important exception is that NII does not include distributions from IRAs or most other retirement plans.

 

• Additional Medicare tax. The 0.9% additional Medicare tax applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds, above. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax.

 

• Long term capital gains and losses. The long-term capital gain and qualified dividend tax rates remain unchanged; however, the income limits for each bracket were adjusted. The brackets remain at 0 percent, 15 percent, and 20 percent. Short-term capital gains are taxed at ordinary income tax rates.

 

• Roth IRA conversion. If eligibility requirements are met, converting a traditional IRA to a Roth IRA is a tax planning strategy that can allow future distributions from the Roth IRA to be tax free. The taxpayer will have to pay tax on the converted funds, but once the money is in the Roth, all future earnings are tax free. Present and future tax rates, as well as the remaining number of years before planned distributions, are key in your decision on whether a Roth conversion makes sense.

 

• Itemized deductions. Since the expansion of the standard deduction with the Tax Cuts and Jobs Act of 2017, many taxpayers have found themselves claiming the standard deduction instead of itemized deductions in the last few years. However, itemizing deductions still makes sense for some taxpayers who have a home mortgage, have large medical bills, make large charitable donations, and/or have high property or state income taxes. The standard deduction in 2022 is $25,900 for joint filers, $12,950 for singles and married filing separately, and $19,400 for heads of household. Taxpayers are able to itemize medical expenses that exceed 7.5% of adjusted gross income, state and local taxes up to $10,000, charitable contributions up to 60% of adjusted gross income, plus mortgage interest deductions on a restricted amount of debt and interest on home equity loans if used for home improvement expenses, subject to the same restrictions as mortgage interest. For those affected by Florida hurricanes and other federally declared disasters, personal casualty and theft losses are deductible as an itemize deduction if they exceed a 10% AGI threshold.

• Charitable Giving Strategies. Charitable contributions are itemized deductions and may be limited to a percentage of your adjusted gross income. (1) A Donor Advised Fund (DAF) allows donors to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to IRS qualified public charities from the fund over time. (2) Donating appreciated stock allows the taxpayer to claim a deduction equal to the fair market value of the stock while avoiding the capital gains that would have otherwise been incurred if the stock was sold. (3)  Individuals age 70½ and older can direct up to $100,000 per year, tax-free, from their IRA to charities through qualified charitable distributions (QCD). By reducing your IRA balance, a QCD may also reduce your required minimum distribution (RMD) in future years, lower your taxable estate, and limit your beneficiaries’ tax liability.

 

• Child tax credit. For 2022, the Child Tax Credit reverts back to its original limit of $2,000 per child from $3,600 in 2021. The credit begins to phase out for married taxpayers with a modified AGI in excess of $400,000 or $200,000 for all other filers. Up to $1,400 of the Child Tax Credit is refundable.

 

• IRA contributions. Taxpayers with earned income that make contributions to a traditional Individual Retirement Account (IRA) may be entitled to a deduction for the amount of the contribution, up to $6,000 ($7,000 if you are age 50 or older). For taxpayers covered by a workplace retirement plan, the deduction is subject to income limitations. For the 2022 tax year, the income phase-out range for single filers is between $68,000 and $78,000. For married couples filing jointly, the phase-out range is between $109,000 and $129,000.

 

• Roth IRA contributions. Taxpayers may only make Roth IRA Contributions if their income falls between or below the income phase-out limitations. For the 2022 calendar year, the income phase-out range is between $129,000 and $144,000 for single filers and heads of household and between $204,000 and $214,000 for married taxpayers filing jointly.

 

• Health savings account. For taxpayers with qualifying health savings account high deductible health plans, health savings account contributions up to $3,650 for individuals and $7,300 for family coverage may be made for 2022 until April 15, 2023.

 

Small Businesses:

 

• Qualified business income deduction. Taxpayers, other than corporations, may be entitled to a deduction of up to 20% of their qualified business income. For 2022, if taxable income exceeds $340,100 for a married couple filing jointly, (about half that for others), the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income up to $100,000 above the threshold, and to other filers with taxable income up to $50,000 above their threshold.

 

• Section 179 and bonus depreciation. For 2022, the section 179 expensing limit is $1,080,000 and the investment ceiling limit is $2,700,000. The amount expensed may not exceed taxable income. Expensing is generally available for most depreciable property (other than buildings) and off the shelf computer software. It also available for qualified interior improvements to a building, elevators & escalators roofs, HVAC systems, fire protection, alarm, and security systems. Businesses may also claim the 100 percent first-year bonus depreciation deduction for qualified machinery and equipment placed in service in 2022. For 2023, the bonus depreciation deduction phases down to 80 percent, and continues to phase down in 20 percent increments in later tax years.

 

 

• Meals and entertainment. For 2022 only, businesses can generally deduct 100% of business related food & beverage purchased from a restaurant, otherwise, the limit is 50% of the cost of the meal. The Tax Cuts and Jobs Act of 2017 brought major changes to deductions for meals and entertainment. While business meals with clients, prospects and referral sources are generally deductible as business meals, entertainment (including sporting, theater, etc) and membership dues for social clubs are not deductible.

 

The Inflation Reduction Act of 2022

 

The Inflation Reduction Act of 2022 (the Act) was signed into law on August 16, 2022. The Act, which is generally effective beginning in 2023, contains new environmentally related tax credits for individuals and small businesses. The Act also extends and modifies some pre-existing tax credits.

 

Extension, Increase, and Modifications of Nonbusiness Energy Property Credit. 

 

The Act extends and increases the Nonbusiness Energy Property Credit to an amount equal to 30% of the cost of installing qualified energy efficient improvement property placed in service before January 1, 2033. The credit is further increased for amounts spent for a home energy audit. The amount of the increase due to a home energy audit can't exceed $150.

 

The Act also repeals the lifetime credit limitation, and instead limits the allowable credit to $1,200 per taxpayer per year. In addition, there are annual limits of $600 for credits with respect to residential energy property expenditures, windows, and skylights, and $250 for any exterior door ($500 total for all exterior doors). In addition, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.

 

Extension and Modification of Residential Clean Energy Credit. 

 

The residential energy efficient property (REEP) credit is extended and modified as the Residential Clean Energy Credit, for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes. This credit, which was scheduled to phase out and end after 2023, is extended through 2032 before phasing out. The Act also makes the credit available for qualified battery storage technology expenditures.

 

Extension, Increase, and Modifications of New Energy Efficient Home Credit. The New Energy Efficient Home Credit (NEEHC) is extended and modified for qualified energy efficient homes acquired before January 1, 2033. The credit, available to eligible contractors is increased, and can be $500, $1,000, $2,500, or $5,000, depending on which energy efficiency requirements the home satisfies and whether the construction of the home meets prevailing wage requirements.

 

New Clean Vehicle Credit. The Act retitles the former “new qualified plug-in electric drive motor vehicle” (NQPEDMV) credit as the Clean Vehicle Credit and eliminates the limitation on the number of vehicles eligible for the credit. The Act also requires final assembly of the vehicle to take place in North America.

 

No credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $300,000 for a joint return or surviving spouse, $225,000 for a head of household, or $150,000 for others. In addition, no credit is allowed if the manufacturer's suggested retail price for the vehicle is more than $55,000 ($80,000 for pickups, vans, or SUVs).

Credit for Previously-Owned Clean Vehicles. A qualified buyer who acquires and places in service a previously-owned clean vehicle after 2022 is allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle's sale price. No credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $150,000 for a joint return or surviving spouse, $112,500 for a head of household, or $75,000 for others. In addition, the maximum price per vehicle is $25,000.

New Credit for Qualified Commercial Clean Vehicles. There is a new qualified commercial clean vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022. The credit per vehicle is the lesser of: (1) 15% of the vehicle's basis (30% for vehicles not powered by a gasoline or diesel engine) or (2) the "incremental cost" of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine. The maximum credit per vehicle is $7,500 for vehicles with gross vehicle weight ratings of less than 14,000 pounds, or $40,000 for heavier vehicles.

 

Increase in Qualified Small Business Payroll Tax Credit for Increasing Research Activities. Under pre-Act law, a "qualified small business" (QSB) with qualifying research expenses could elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer's share of Social Security tax.

 

Due to concerns that some small businesses may not have a large enough income tax liability to take advantage of the research credit, for tax years beginning after December 31, 2022, QSBs may apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit cannot exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.

 

This letter is based on the current federal tax laws, rules and regulations. Please remember this letter is intended to serve only as a general guideline and each taxpayer’s circumstances should be considered before any significant opportunities are utilized. Please let us know if you would like to schedule a meeting to assist you with your tax planning needs.

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Very truly yours,

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Weston & Gregory, LLC