Year-End Tax Planning (Itemized Deductions)
Year-End Tax Planning (Itemized Deductions)
In the previous newsletter, year-end tax moves were discussed for taxpayers who filed their taxes using the standard deduction. To recap, some strategies available for taxpayers using the standard deduction include:
• Checking Paycheck Tax Withholding
• Maximizing Your Retirement Account Contributions
• Using Up Your Flexible Spending Account Before the Spending Deadline
• Tax Loss Harvesting
• Taking RMDs from Traditional Retirement Accounts (if aged 72 or older)
Now we will go for additional tax strategies for those that itemize deductions. You will itemize deductions on your tax returns if they are greater than your standard deductions. The standard deductions for 2022 are:
Single or Married Filing Separately $12,950
Married Filing Jointly and Surviving Spouses $25,900
Head of Household $19,400
The following strategies can be used if you itemize deductions to lower your taxable income on your tax returns:
1. Medical Expense Deductions
The IRS allows a deduction of unreimbursed medical expenses for payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They also include the costs of equipment, supplies, and diagnostic devices needed for these purposes. According to the IRS, these are acceptable medical expenses. Any medical expenses that are reimbursed through insurance, flexible spending accounts or HSA reimbursements are not deductible.
You can deduct the amount of medical and dental expenses that is more than 7.5% of your AGI. What does this mean? If you have an AGI of $50,000, then any medical expenses above $3,750 are tax deductible. Expenses up to $3,750 would not be deductible.
If you have a year with lower income, there is a greater chance to use the medical expense deduction if you incur large medical expenses in the same year.
You can also deduct 18 cents per mile for the period January 1, 2022 through June 30, 2022 and 22 cents per mile for the period July 1, 2022 through December 31, 2022 for transportation costs essential to medical care.
2. Charitable Contributions
Giving money or tangible property can yield tax benefits, in addition to helping the disadvantaged through public charities, donor advised funds or foundations. There are several contribution limits and are as follows:
• Limited to 60% of your adjusted gross income for cash donations to public charities that are classified as 501(c)(3) organizations. This includes cash gifts to donor advised funds. The cash gifts are deductible when they are made to the donor advised fund, not when the donor advised fund makes the gifts to public charities.
• Limited to 50% of your adjusted gross income for non-cash contributions (usually household items, linens, electronics, appliances and furniture or clothing that must be in at least good condition or better).
• Limited to 30% of your adjusted gross income for gifts of long-term capital gain property (stocks or crypto held for more than one year) made to public charities.
• Limited to 20% of your adjusted gross income for long-term capital gain property donated to nonpublic charities such as private foundations
You can also make charitable donations directly from your IRA if you have reached 70 ½ years of age up to $100,000 annually to IRS approved public charities.
You can also deduct the mileage for driving to and from your volunteer work at a rate of 14 cents per mile in 2022. Bus or rail fare for public transportation while volunteering is deductible as well.
3. Accelerate Tax Deductions
You can accelerate certain tax deductions besides charitable contributions by making payments early to take advantage of available deductions. They include making an estimated income tax payment before year-end for a bill due on January 15th of the following year. Paying a property tax bill early or paying a doctor or hospital bill.
There are other considerations when tax planning that do not consider standard or itemized deductions. They are as follows:
1. Avoiding the Kiddie Tax
A tax that was created to prevent parents from transferring income producing stocks to children to avoid paying a higher tax rate. For 2023, the child’s investment income above $2,300 triggers a kiddie tax that is taxed at the same rate as the parents. The tax applies to children who are full-time students until the year the child turns 24 years old.
2. Watch out for the Alternative Minimum Tax
An increase or acceleration of tax deductions can trigger the alternative minimum tax or AMT which can lead to a higher income tax. State and local income taxes and property taxes are not deductible under the AMT. If there is a possibility of becoming subject to the AMT, then avoid accelerating installments in December 2022 that are due in January 2023.
3. Take Advantage of Going Green
With the passing of The Inflation Reduction Act of 2022 (IRA), there are tax incentives to make energy efficient improvements to your residence. These include energy efficient water heaters, heat pumps, HVAC systems and solar panels. The law goes into effect after December 31, 2022.
There is also a clean vehicle credit available, which can be up to $7,5—for buyers of new all-electric vehicles and hybrid plug-ins. The credit has been extended to 2032. Taxpayers will get a credit of $3,750 for meeting critical minerals requirements and a $3,750 credit for meeting the battery component requirement. There are MAGI limitations and a chart on how to maximize the clean vehicle tax credit. You can read about it here.
4. HSA Contributions
If you contribute to an HSA, you can take advantage of the increase in contribution amounts in 2023. Self-only coverage contributions will be increased to $3,850 and for family up to $7,750 in 2023. If you are 55 or older, you can contribute an additional $1,000 towards your HSA.
If you have any questions or want to discuss year-end tax planning, reach out to me at email@example.com.
Thanks for reading.