End-of-Year Tax Planning Checklist

I don’t think anyone would argue that the last three tax years have been bizarre, to say the least. From Pandemic-driven extensions to the tax filing date to stimulus payments, the American Rescue Plan, student loan forgiveness, IRS staffing shortages and more, all we accountants can do is remain calm and cross each bridge as we come to it!

As we head into the end of 2022, the biggest concern at the IRS is keeping its head above water. The service is more behind than it’s ever been — last I heard, the queue of unprocessed material was 17 million documents. As a result, all kinds of unnecessary and incorrect notices about missing or late payments and penalties are being issued in error. If you received one and don’t believe it’s correct, you’re probably right. Just give it some time to get straightened out, or give us a call and we can advise you.

The IRS made the decision to forgive late-filing penalties on all returns for 2019 and 2020 if they were filed by the end of this September. This means many of you will start receiving checks from the IR for late penalties that were incurred and are now being refunded as a result of this decision. No action is needed on your part; it’ll just happen over the next few months.

There have also been a number of developments this year with regard to tax filing, and this may affect you. To help you keep your priorities in order and your deadlines straight, we’ve put together this list of end-of-year tax planning tips for individuals and businesses.

Student Loan Forgiveness

This summer, President Biden announced that most federal student loan borrowers will be eligible for some type of forgiveness — up to $20,000 for those who received Pell Grants, and up to $10,000 for those who didn’t. It applies to individual borrowers earning less than $125,000 per year, or married couples/heads of household earning less than $250,000. (Private loan holders are excluded.)

Though at the time of this writing, many challenges to this forgiveness have been brought to the table, there are still millions of borrowers out there who can expect to see some or all of their loan debt forgiven this year.

How does this affect your taxes? It may not, depending on the state where you live. Obviously, in Nevada, there is no state income tax, but if your state of residence does collect income tax, you’ll want to check whether it has followed the federal government’s decision not to consider this forgiven debt as taxable income. Most states are waiving taxes for this debt forgiveness, but so far, Mississippi, North Carolina, and Indiana are planning to tax it, and some states are still deliberating this issue.

Plan Your Gifts

We’re not talking about Christmas shopping here — this refers to financial gifts you may give to loved ones. Currently, the tax law allows for an annual exemption of a $16,000 gift per person. A financial gift can be a straight cash payment, or it can mean college expenses being paid directly to the institution, a deposit into a 529 college savings plan, or even forgiveness on an outstanding personal loan. Gifts must be given in plenty of time before January, meaning that checks must clear the bank by December 31, 2022 in order to qualify for this exemption. I have indeed heard of court cases in which recipients didn’t cash their checks until January, thereby making the timing of the gift questionable — don’t let this happen to you.

The IRS also allows for gift splitting, meaning that a married couple can qualify for the annual gift exemption even if they together give up to $32,000 to the same individual. However, if you wish to do this, you MUST file a Form 709 — U.S. Gift Tax Return — next year.

Consider Charitable Giving

Recent changes to the tax law raised the standard deduction to $12,950 per individual or $25,900 for a couple. For some, this is good news, but if in the past you’ve itemized deductions for charitable donations and other expenses, this may not be favorable — your total of mortgage interest, real estate taxes paid, and charitable contributions would have to be more than the standard deduction to see any benefit on your tax return. This disincentivizes giving, which has had negative impacts for a lot of organizations.

There are ways to make your donations count, however. First, you can contribute to a Donor-advised Fund (DaF). This arrangement allows you to prepay for donations for several years ahead of time, then advise the account manager when and how much to distribute to the organizations of your choice. Prepaying allows you to surpass the standard deduction, so you can write off the donation but still provide steady levels of donations for the next few years. For example, if you wish to donate $10,000 to a charity, and your other itemized deductions do not exceed $2,950 (for singles), this doesn’t exceed the standard deduction. But if you paid for two years at a time — $20,000 — into a DaF, you could request to distribute $10,000 this year and $10,000 next year, and you can write off the entire $20,000 for the 2022 tax year.

Prepay to Itemize Deductions

Along these same lines, know that the increase in the standard deduction was designed to replace itemized deductions for donations, mortgage interest, accounting fees, DMV fees, real estate tax, and more. In some ways, this streamlines the tax preparation process. However, it limits the benefits of paying certain fees. Sometimes there is a way around this, however: prepayment.

If you prepay enough to exceed the standard deduction, you can benefit from a deduction for the 2022 tax year. For example, say you are part of a married couple who files jointly, and you’ve paid $15,000 in mortgage interest this year and donated $8,000 to charitable organizations. This totals $23,000, which still falls below the standard deduction of $25,900. If you prepaid some charitable giving, real estate taxes, or another expense for 2022 before this year is over, you could feasibly exceed the standard deduction and qualify for reduced taxable income, and immediate tax savings for you.

Convert to a Roth IRA

We recommend that individuals convert their traditional retirement accounts, which defer taxes until withdrawal (at a potentially higher rate than today’s), to Roth IRAs, which contain funds that have already been taxed. This means that when you withdraw funds, you pay no additional taxes — and neither would any heirs on this account. Additionally, traditional IRAs involve required minimum distributions (RMDs). The age to begin RMDs is 72. However, Roth plans have no such requirement.

But this is general advice and may not suit everyone right now. Contact us, and we can sit down with you to look at your tax rate, income situation, etc. to determine whether this is a good option for you.

Remember that if you plan to make IRA contributions (Traditional or Roth) for 2022, you may do so until Tax Day, April 17, 2023. Traditional-IRA-to-Roth conversions would have to be finished by December 31, 2022.

Address Retirement Contributions

Speaking of your retirement, now is the time to review your employee contribution to a 401(k) or similar retirement accounts. If you’re in a position to increase your contribution before the year’s end, it could lower your taxable income, thereby lowering your tax burden. The maximum contribution for 2022 is $20,500 per person up to age 50, and for those older than 50, the maximum is $27,000. Check your paystub; if you’re not close to that and can afford to contribute more, do so.

Review Your Finances Now

The end of the year is the perfect time to make an appointment with a CPA to review your financial picture. If you schedule an appointment with us, we can happily meet with you in person or via videoconference to make recommendations for improving your tax situation, increasing your financial gains, and achieving long-term goals.

As always, remember that we’re here for any of your tax and small business needs. Happy planning!