During much of 2020 and 2021, you may have qualified for the Employee Retention Credit (ERC). Lawmakers created this tax credit in response to the COVID-19 pandemic.
With the ERC, you found (or could find) tax credits of up to $26,000 per employee. That’s a lot. With 10 employees, that’s $260,000.
Key point. If you have not claimed the ERC, you can amend your 2020 and 2021 payroll tax returns for the credit. (Amending the payroll is not difficult—so no sweat on that score.)
Three Ways to Qualify:
- Decline in gross receipts (on a quarterly basis, by more than 50 percent in 2020 compared with 2019, and by more than 20 percent in 2021 compared with 2019)
- A COVID-19 government order that caused a full or partial shutdown (think physical space)
- A COVID-19 government order that caused more than a nominal effect (think modification of activity)
Two Types of ERC Qualifications: Receipts and Government Orders
First, if you can qualify for the ERC under the gross receipts test, go that route. It’s easy to prove and you get the ERC for the full quarter.
With the shutdown or modification because of a government order, you get the ERC only for the days that you suffered a full or partial suspension or suffered more than a nominal effect on your business. For example, if you suffered for 27 days, you can qualify for credit for those 27 days.
If you can’t qualify under the 50 percent or 20 percent decline in gross receipts test, your only alternative is the government order.
What Government Rules create the ERC for You?
If you can establish that your business was fully or partially suspended because of a COVID-19 federal, state, or local government order, you are eligible on a day-by-day basis for the ERC during those periods of full or partial suspension. Given the possibility of tax credits equal to $5,000 per employee in 2020 and $21,000 per employee in 2021, this is worth pursuing.
Remember 2020 and 2021. It’s hard to think that your business did not suffer due to a federal, state, or local government order during this COVID-19 pandemic. Even if you are an essential business, you likely suffered to some degree.
Here’s a short list of how a government order could have caused your full or partial shutdown:
- You had to limit your hours of operation.
- You had to temporarily shut down operations.
- You had to close your workplace to some or all of your employees.
- Your employees were subject to a curfew and could not work during normal work hours.
- Your business had to shut down for periodic cleaning and disinfecting.
- The government order caused a supply chain disruption that caused you to cut back operations.
Full or Partial Shutdown Safe Harbor
You likely have no trouble identifying the full shutdown caused by a federal, state, or local government order. One thing to remember, as we mentioned before: when you qualify for the ERC under the full or partial shutdown, you earn the ERC only for the shutdown period.
To determine if your business suffered a partial suspension of operations from a government order, you need to have had more than a nominal portion of your business suspended. The question follows: “What is a nominal portion?” Say thanks to the IRS. Rather than rely on facts and circumstances, you can rely on the IRS safe-harbor 10 percent definition of nominal portion.
It works like this.
The effect of the government order is deemed to constitute more than a nominal portion of your business operations if either:
- the gross receipts from that portion of the business operations are not less than 10 percent of the total gross receipts (both determined using the gross receipts for the same calendar quarter in 2019), or
- the hours of service performed by employees in that portion of the business are not less than 10 percent of the total number of hours of service performed by all employees in the employer’s business (both determined using the number of hours of service performed by employees in the same calendar quarter in 2019).
Example. A 2020 government order requires Sam to shut down his bar and restaurant for sit-down service. Sam looks at his 2019 quarterly results and finds that his sit-down service was 73 percent of his gross receipts for that quarter. During the 61 days that Sam was shut down by this government order, he qualifies for the ERC.
The full or partial shutdown is about a physical space change. You can also qualify for the ERC if the government order caused a modification to your business.
Nominal-Effect Safe Harbor for a Modification to Your Business
Unlike the partial shutdown, where you can identify affected operations by physical space, the nominal-effect safe harbor comes into play when there’s a modification required by a federal, state or local COVID-19 governmental order that has more than a nominal effect on your business operations. For example:
- The government order limited your use of the physical space (e.g., keeping people and tables six feet apart).
- The government order limited the size of gatherings, which affected your business (e.g., no more than 10 people in the store).
Here, you are faced with a facts-and-circumstances situation.
But again, you can thank the IRS for another safe harbor. The IRS deems that the federal, state or local COVID-19 government order had a more-than-nominal effect on your business if it reduced your ability to provide goods or services in the normal course of your business by not less than 10 percent.
Example. Linda’s restaurant had to reduce its dining capacity from 100 to 60 patrons because of a government order. For this period, Linda qualifies for the ERC because she suffered more than a 10 percent reduction in the restaurant’s ability to service customers.
Earn 9.62 Percent Tax-Deferred with Series I Bonds
Through October 2022, you can buy Series I bonds that pay 9.62 percent interest. And you receive that rate for six months from the time of purchase.
What happens after that? On November 1, 2022, the U.S. Treasury Department sets a new six-month rate equal to the fixed rate (currently zero) plus the Consumer Price Index inflation rate.
The interest you earn for the first six months gets added to the principal, and you earn interest on that interest during the next six months (think compound interest).
Sounds too good to be true. There’s a trick, right? Not really, but the government keeps your money, both your principal and your interest, for at least one year.
It works like this: You are buying a 30-year bond. The interest rate changes every six months. You can cash out any time after one year, but if you cash out before five years, you have to forfeit three months of interest (no big deal).
You don’t pay taxes on the interest until you cash out. You get the compounding effect tax-free. It’s like a Roth IRA without age limits and penalties.
Key point. You can’t lose the money you invest or the interest you earn, other than the three months’ interest if you cash out before five years.
When you do cash out, you pay federal income taxes on the interest, but you don’t pay state, county, or city income taxes.
It is possible (albeit unlikely for many of you) to avoid taxes on the interest altogether if you use the monies for qualified higher education expenses.
Okay, So What’s the Downside?
You can’t buy more than $10,000 per year, although if you buy from “Treasury Direct” and also utilize your tax refund, you can acquire $15,000 of bonds per year. The I bond purchase limit on a tax return is $5,000—regardless of joint or single filing.
If you’re married, your spouse can buy $10,000, so now you’re up to $25,000 per year.
Now, let’s add in your corporation or corporations. Such entities can purchase up to $10,000 of such bonds per calendar year.
Example. Jack, his spouse, and his two corporations are hot for the 9.62 percent of tax-deferred interest. He has not yet filed his 2022 tax return, which shows a tax refund. With Jack, his spouse, and his two corporations, Jack can buy $45,000 of I bonds in the calendar year 2022.
He can do the same during the calendar year 2023. The major downside to the bonds is that you cannot buy more than the annual limits above. There’s no overall limit, just the annual limits.
Inflation and Deflation
The Series I bond is based on inflation. So if inflation drops to zero, cash out that bond. Meanwhile, ride this inflation wave. And remember, your Series I bond cannot go down in value. If your $10,000 I bond earned $985 in interest, the new principal balance is $10,985 and that principal balance never goes down. Deflation can’t hurt it.
How Would You Like To Earn 6% Interest on Your Money?
As of August 5, 2022, the Internal Revenue Service still has over 9.7 million unprocessed tax returns from 2021 and approximately 20 million from 2020. The good news in this bad news scenario is that the IRS must pay you 5% interest on your refund which goes to 6% in October 2022. From the time you filed your tax return, the IRS has 45 days to process your refund or start accruing 5% interest compounded daily, and again it starts accruing 6% on October 1, 2022. Now, that is for correctly filed tax returns only, if you have errors on your return, no interest until it is corrected and the 45 days have elapsed.
How do you compute daily compounded interest? Simply divide 6% by 365 days then multiply the result by the number of days until they issue the check to compute the interest added to your refund.
The Inflation Reduction Act (IRA) Increases The IRS Budget by $80 Billion Dollars Over 10 Years
Approximately 40% of that will help the IRS to become more efficient and the balance is for more enforcement. In fact, the Internal Revenue Service has approximately 78,000 employees currently and this legislation will allow them to hire 80,000 new employees not to process tax returns, but to become auditors to go after individuals and businesses they feel may not be paying their correct amount of tax.
The Act will also increase the complexities of the Internal Revenue Code and Regulations. Judge Learned Hand, said, “ Tax law touches human activity at so many points it could never be made simple”. Benjamin Franklin said, “ Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes”. If he were alive today I think he would agree that there is one good thing about Death, it doesn’t get worse every time congress meets.
The Act creates two new corporate taxes and either expanded or launched 26 tax credit programs each with its own set of rules and restrictions.
It is funny to me that the title of this act is: “The Inflation Reduction Act” and its main components are increased spending and increased taxation. Someone needs to tell congress that increased corporate taxation does not mean that corporations will pay their fair share, it means that corporations will pass the increased tax burden on to the consumer and that is inflationary. So, increased spending is inflationary and corporate taxation is inflationary so how is this “The Inflation Reduction Act”?
In 2021, the IRS collected more than $4.1 trillion in total taxes from all sources. To do so required Americans to file 261 million tax returns. Some 75 percent of these, or 197 million were from income tax returns (both individual and corporate), while another 33.9 million were employment tax returns.
According to the latest estimates from the White House Office of Information and Regulatory Affairs (OIRA), Americans will spend more than 6.5 billion hours complying with IRS tax filing and reporting requirements in 2022. So why not make it even more complex?
The new corporate minimum tax of 11% is on Book income, not Taxable income. Book income is, Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a widely used measure of core corporate profitability. This means that there will be much less corporate investment in new buildings, equipment, R & D, renovations, etc., as these expenditures are currently deductible against taxable income, however, not book income. Less expenditure in this type of investment causes additional drag on consumption and is bad for the economy. Again additional taxes are a cost of operations that is passed on to the consumer and/ or causes corporate employee layoffs.
The Act also creates a 1% excise tax on corporations when they buy back their own shares from the marketplace. When a corporation buys back shares, that is good for shareholders as there are fewer shares in the marketplace sometimes increasing the value and showing investors what the company thinks about the worth of their own shares. The 1% excise tax will make many corporations rethink the buyback process.
The Inflation Reduction Act (IRA) Grant a $7500 Tax Credit For Some Electric Vehicles
First, let’s start with the limitations – the credit will only be available to individuals earning less than $150,000 per year, or married couples earning less than $300,000, and will only be offered on electric cars costing less than $50,000 and electric trucks and SUVs costing less than $80,000.
Second, vehicle manufacturers reaching the annual cap (first 200,000 vehicles produced) of production are entitled to the credit. After the cap on production is reached then no more credits until next year. Many manufacturers have already reached their 2022 cap limit; 2022 Chevrolet Bolt EUV, 2022 Chevrolet Bolt EV, 2022 GMC Hummer Pickup, 2022 GMC Hummer SUV, all models of Tesla Models 3, S. X, and Y. 2023 Bolt EV, 2023 Cadillac Lyriq, as of the date of this letter.
Let Us Now Look At Some Mid-Year Tax Planning Ideas
Business Meals Deduction For The Balance Of This Year
This chart will help you get ready. Check the table below for what you can do in 2021 and 2022 as the law stands now:
|Amount Deductible for Tax Years 2021-2022|
|Restaurant meals with clients and prospects||X|
|Entertainment such as baseball and football games with clients and prospects||X|
|Employee meals for the convenience of the employer, served by an in-house cafeteria||X|
|Employee meals for a required business meeting, purchased from a restaurant||X|
|Meal served at the chamber of commerce meeting held in a hotel meeting room||X|
|Meal consumed in a fancy restaurant while in overnight business travel status||X|
|Meals cooked by you in your hotel room kitchen while traveling away from home overnight||X|
|Year-end party for employees and spouses||X|
|Golf outing for employees and spouses||X|
|Year-end party for customers classified as entertainment||X|
|Meals made on premises for the general public at a marketing presentation||X|
|Team-building recreational event for all employees||X|
|Golf, theater, or football game with your best customer||X|
|Meal with a prospective customer at the country club following your non-deductible round of golf||X|
Some $48 Million Workers Are Expected To Leave The Workforce This Year
Roughly 47 million workers left their jobs last year according to a report by CNBC and an estimated 48 million will join them this year, it is referred to as “The Great Resignation”.
Will they be able to contribute to a Retirement plan when they are no longer employed?
You may have joined the Great Resignation, maybe temporarily or maybe for good.
Or your non-working status might have nothing to do with the Great Resignation. For instance, you could be a stay-at-home parent.
In any case, as a spouse with no tax-defined earned income, you might want to continue saving for retirement in a tax-favored fashion by making contributions to a traditional or Roth IRA.
An IRA set up to receive contributions by a non-working spouse is known as a spousal IRA.
The working spouse can make IRA contributions to it too.
Non-Working Spouse: Traditional Spousal IRA Contributions
For the 2022 tax year, you (the non-working spouse) can make a deductible contribution of up to $6,000, or up to $7,000 if you’ll be age 50 or older as of December 31, 2022, to a traditional spousal IRA set up in your name.
To make a traditional spousal IRA contribution, you must file a joint Form 1040, and you and your spouse must together have earned income—typically from your working spouse—at least equal to the sum of your contribution plus your spouse’s contribution, if any.
Note that taxable alimony received by you or your spouse under a pre-2019 divorce agreement counts as earned income for IRA contribution eligibility purposes.
Now It Gets Tricky
If your working spouse is covered by a tax-favored retirement plan, via a job or self-employment, the deductibility of your traditional spousal IRA contribution is phased out, for the 2022 tax year, between joint adjusted gross income (AGI) of $204,000 and $214,000.
Joint AGI is the sum of most taxable income items and gains, reduced by so-called above-the-line deductions. These include:
- the deduction for contributions to a self-employed SEP, SIMPLE, or another self-employed retirement plan
- the deduction for 50 percent of self-employment tax;
- the deduction for self-employed health insurance premiums;
- contributions to a health savings account (HSA);
- alimony payments required by a pre-2019 divorce agreement;
- the deduction for up to $250 of unreimbursed expenses for K-12 educators; and
- the deduction for moving expenses for eligible members of the Armed Forces.
If your working spouse is not covered by a tax-favored retirement plan, via a job or self-employment, you (the non-working spouse) can make a deductible traditional IRA contribution regardless of how high your joint AGI might be.
Working Spouse: Traditional IRA Contributions
If neither you nor your working spouse participates in a tax-favored retirement plan, via a job or self-employment, your working spouse can make a deductible contribution of up to $6,000 for the 2022 tax year to a traditional IRA set up in his or her name (regardless of your joint AGI level), or up to $7,000 if your working spouse will be 50 or older as of December 31, 2022.
You as a non-working spouse can make a deductible contribution to a traditional spousal IRA set up in your name, subject to the same limits.
But you and your spouse must together have enough earned income to at least match the combined amount of your contributions. All the requisite earned income can come from your working spouse. Once again, note that taxable alimony received by you or your spouse under a pre-2019 divorce agreement counts as earned income for IRA contribution eligibility purposes.
On the other hand, if your working spouse participates in a tax-favored retirement plan, his or her ability to make a deductible traditional IRA contribution for the 2022 tax year is phased out between joint AGI of $109,000 and $129,000.
Retirement Plans Owners of companies should consider putting retirement plans into service before December 31. Some types to consider:
- SEP- IRA – 25% of your wages but not more than $61,000 (IRC Section 404(h)(1)(C)
- 401(k) – 25% of your wage, but not more than $61,000 considering both your employee and corporate (employer) contributions ($67,500 if age 50 or older) IRC Section 402(i) and IRS Notice 2021-61
- SIMPLE–IRA – $14,000 ($17,000 if 50 or older) Plus either: (1) A matching contribution of 3 percent of your employee deferral up to 3 percent; or (2) A nonelective contribution of 2 percent of compensation to all eligible employees (you) whether or not you make a salary deferral. IRS Sections 408(p)(2)(A), 408(p)(2)(C)(ii)(I), 408(p)(2)(B)
- Traditional IRA – $6,000 ($7,000 if 50 or older)
- Roth IRA – $6,000 ($7,000 if 50 or older) some income limitation apply
- Defined Benefit Plan – Actuarially determined amount needed to fund annual retirement benefit of up to $245,000. IRC Section 404(a)(1), 404(a)(8), 415(b)(1)(A) and Notice 2021-61
Business Equipment Purchases
Bonus depreciation allows you to write 100% of the cost for machinery and equipment bought and placed in service before January 1, 2023. The bonus depreciation deduction is reduced in future years; it drops to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and no bonus after 2026.
Expensing under IRS Code Section 179. In 2022 Section 179 deduction limit for businesses is $1,080,000 (a $30,000 increase from 2021). Your business can deduct the full price of qualified equipment with a “total equipment purchase” limit of $2.7 million.
New Mileage Rate
Small businesses that qualify to use and do use the standard mileage rate can deduct 62.5 cents per business mile from July 1 through December 31, 2022. That’s up 4 cents a mile. From January 1 through June 30, 2022, it is 58.5 cents per mile. Qualifying small businesses can use either actual expenses used to operate your business use vehicle or the standard mileage rate.
If you start the first year using the standard mileage method, you may switch to the actual expense method later, however, if you start with the actual expense method you may not switch to the standard mileage method, except with two timely exceptions.
Employ Your Children in Your Business
If you have minor children that work in your business, pay them. The amount you can pay them is the fair wage that you would have to pay anyone else performing that same job function. Let’s assume you have a 15-year-old son that performs the clean-up function (janitorial duties) at your office and you have a single member LLC and you are paying him $12,000 per year, let’s consider the benefits to you and him:
- You get to deduct the $12,000 just like any other payroll expenses
- Your son and you are exempt from social security tax on his wage
- Your son and you are exempt from Medicare tax on his wage
- In most states his wage would be exempt from unemployment tax
- Your son would be eligible to have a ROTH IRA as his standard deduction is $12,950
- He could contribute his money to the ROTH or you could gift him the $6,000 ROTH contribution and help him start a retirement plan
- In fact you could pay your child as much as $18,950, contributing to a regular deductible IRA of $6,000 and he would own zero tax.
Key point 1. Your single-member LLC is a “disregarded entity” for federal tax purposes. It’s taxed as a sole proprietorship (unless you elect corporate tax treatment).
Key point 2. Your son has a $12,950 standard deduction. This means he also pays zero tax on earned income up to that amount.
Sole-Proprietorship and Single-Member LLCs Benefit Plan
Hire your spouse and incorporate a Section 105 Plan. You do not have to pay your spouse a lot of wage for this to work. Under the Section 105 Plan, all of your family medical expenses become a Schedule C tax deduction. Medical expenses include health insurance costs and out-of-pocket medical expenses, as a business deduction, you save income tax and self-employment tax, and remember most taxpayers do not get to have a medical deduction as medical expenses are an itemized deduction subject to limits of their AGI.
Small Business Medical Plans
All business owners with 49 or fewer employees should have a medical plan for their business. Is it required? No, 49 or fewer employees do not require you to have a plan, however, let’s consider some benefits:
- Make sure to claim the federal tax credit equal to 100 percent of required (2020) and
voluntary (2021) emergency sick leave and emergency family leave payments. It’s likely
that you made payments that qualify for the credits.
- If you have a Section 105 plan in place you have not been reimbursing expenses monthly,
do a reimbursement now to get 2021 deductions, and then put yourself on a monthly
reimbursement schedule in 2022.
- If you want to implement a Qualified Small Employer Health Reimbursement
Arrangement (QSEHRA), but have not yet done so, make sure to get that done properly
now. You are late, so you could suffer that $50-peremployee penalty should your lateness
be found out.
- But if you are thinking of the QSEHRA and want to help your employees with more money
and flexibility, be sure to consider the Individual Coverage Health Reimbursement
Arrangement (ICHRA). It’s got more advantages.
- If you operate your business as an S corporation and you want an above-the-line tax
deduction for the cost of your health insurance, you need the S corporation to (a) pay for
or reimburse you for the health insurance, and (b) put it on your W-2. Make sure that
the reimbursement happens before December 31 and that you have the reimbursement
set up to show on the W-2.
- Claim the tax credit for the group health insurance you give your employees. If you
provide your employee’s group health insurance, see whether your pay structure and
number of employees – put you in a position to claim a 50 percent tax credit for some or
all the monies you paid for health insurance in 2021 and possibly in prior years.
Other Employer Programs
- Paycheck Protection Program
- Paid sick leave and Paid family leave credit
- Employee Retention Credit
- Cobra premium Assistance
- HRA Final Regulations (Health Reimbursements Arrangements)
De Minimis Safe Harbor Election
Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the cost of lower-cost assets, materials, and supplies, assuming the cost does not have to be capitalized under Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit property can’t exceed $5,000 when the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, consider purchasing such qualified items before the end of 2022.
PLANNING TIP: The purpose of this election is to reduce the depreciation of small asset acquisitions used in your trade or business. This is another form of expensing like Code Sec. 179, however, there is no recapture of depreciation when the asset is disposed of later.
Hobby Or Business
Making sure your business is not a hobby is important as Hobby Income is taxable, however, there are no deductions allowed, therefore, much more taxable income. Most businesses must show a profit for three of five years, there are exceptions to the rule such as the business is your only source of income and your debt financing allows you the time to get the business up and running.
Corporate Accountable Plans
A corporate accountable plan is a reimbursement plan that should be part of your corporate minutes and outline the expenses the corporation will reimburse the employee for, and the timeline for reporting (weekly, monthly, etc.). The types of reimbursement programs could be; home office deduction, meals expense, travel expense, etc.
Remember you are an employee of your company and, therefore, you are entitled to this reimbursement plan as well. Let’s say you operate your business out of your home. As a corporation, you should not be paying your mortgage, power bills, etc. from the business account, however, reimbursing yourself for these expenses monthly is perfectly legal. You just need an accountable plan to prefect this expense. In this example, you can only reimburse that portion that is actually used for business. Once you determine the percentage of your home that is for business use, you can deduct; interest, taxes, utilities, repairs, maintenance, lawn service, pool service, maid service, and depreciation on that portion of your home, any direct expense, and indirect expense associated with that home.
Individuals Who Are 72 Years Of Age Or Older
In this calendar year, you must take a Required Minimum Distribution (RMD) from your IRA by December 31, 2022. There is a 50% penalty tax for forgetting this provision. A planning tip that is still available is to make charitable contributions directly from your IRA to the charity. The distribution counts toward your RMD and you do not pay tax on the distribution. Charitable contributions to be deductible must be itemized and with the high standard deduction, few people qualify to itemize. This strategy is a great alternative to taking the distribution and then contributing as this is taxable and may not be deductible.
Another use of the RMD could be for estimated tax. Many taxpayers forget to pay estimated tax for the liability they may owe at year-end. Remember you can direct your IRA custodian to withhold any amount of your distribution up to 100% of the distribution, therefore, helping you satisfy your estimated tax.
ROTH IRA Conversion
Convert a traditional IRA to a ROTH IRA before year-end to accelerate income and make future earnings grow tax deferred and distributions nontaxable. A perfect time to consider this is when your IRA may have suffered a market decline. This strategy works when your income is sufficiently low enough to not have adverse tax effects. Remember this increases your Adjusted Gross Income(AGI) and many other issues are affected by AGI, such as increased capital gains tax, increased Medicare premiums, increased social security benefits being taxed, and others.
Charitable Contribution Limits Changed
The last year 2021 charitable contributions deduction limits were 100% of AGI, for 2022 it is 60% of AGI. Effective for 2026 the amount goes to 50% of AGI.
Use Of FSA and HSA Plans:
Consider increasing the amount you set aside for this year in your employer’s health flexible spending account (FSA), if you set aside too little for this year. If you become eligible in December of 2022 to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions for 2022. The HSA 2022 limits are; $3,650 for self-only coverage and $7,300 for family coverage. People age 55 or older get $1,000 more.
|Contribution and Out-of-Pocket Limits
for Health Savings Accounts and High-Deductible Health Plans
|HSA contribution limit (employer + employee)||Self-only: $3,650
|HSA catch-up contributions (age 55 or older)||$1,000||$1,000||No change|
|HDHP minimum deductibles||Self-only: $1,400
|HDHP maximum out-of-pocket amounts (deductibles, co-payments, and other amounts, but not premiums)||Self-only: $7,050
|Source: IRS, Revenue Procedure 2021-25.|
Health Savings Accounts Can Be The Ultimate Retirement Account
An HAS can provide you with the following benefits:
- You or your employer can deduct the contributions, up to the annual limits
- The money in the account grows tax-free (and you can invest it in many ways)
- Distributions are tax-free if used for medical expenses
- Unlike an IRA or 401 (k) you do not have to take RMDs at age 72
- You can distribute from your HAS anytime
- You need never take distributions from your HAS and if you name your spouse as beneficiary it gets treated as their HAS, therefore, no income tax.
Gifting To Avoid Gift Tax
Consider making gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift or estate taxes. The exclusion applies to gifts up to $16,000 made in 2022 to each of an unlimited number of individuals. There is an unlimited transfer directly to educational institutions for tuition (not considered a gift), or unlimited transfer to medical care providers (not considered a gift). You cannot carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
PLANNING TIP: Many may prefer CASH, however, consider appreciated stocks, mutual funds, or
other appreciated assets. Remember the transfer of these assets is transferred at FMV so keep
the FMV at $15,000 or under. The basis of the asset transfers as well. For example; if you own a stock position that has a market value of $16,000 with a cost basis of $5,000 for a gain of $11,000, and you transfer to an individual that is in a ZERO capital gains bracket then the $11,000 gain would not be taxable. Remember there are three capital gains brackets; 0%, 15%, and 20% depending upon your adjusted gross income.
Other 2022 Changes
Child Tax Credit – Effective 2022, the child Tax Credit is $2,000 per qualifying child, of which $1,500 is refundable. A qualifying child is a dependent child who has not attained the age of 17 as of the close of the calendar year.
Earned Income Credit – Effective for 2022, a taxpayer with no qualifying children has to be at least age 25 and under age 65 to qualify for EIC
Dependent Care Credit and Exclusion – Effective for 2022, the dependent care expense limitation is $3,000 for one child and $6,000 for two or more children. The credit is a nonrefundable credit. The credit ranges from 35% of expenditures to 20% depending upon AGI
Any amount over $43,000 AGI would limit to 20%.
Educator Expense Deduction without Itemizing – Eligible educators may deduct up to $300 of unreimbursed expenses for the cost of books, supplies, computer equipment, and supplementary materials used by the educator in the classroom ($600 MFJ) if both spouses are eligible.
The are many other planning strategies available for mid-year planning and if you wish to discuss some of these personally, just contact my office at 702-878-3900 for an appointment at no charge.
Congress and the president just made “The Inflation Reduction Act” law and in future Tax-Tip letters, I will discuss how this new law may affect you. Please enjoy the balance of your summer, and stay healthy, happy, and wise.
Al Whalen, EA, ATA, CFP®
Bradford Tax Institute
CPA Practice Advisor
NAEA Journal and Newsletter
The Tax Foundation
Accountant’s Daily Insights
The Inflation Reduction Act (IRA)
The Tax Book
IRS Code, Regulations, Procedures, and Notices