The end of the year is rapidly approaching and it is time to begin planning year end tax strategies to help lower your 2022 tax burden. It is important that you get in touch with your financial advisor ASAP for a tax strategy session to make sure you are taking advantage of all the deductions you are eligible for. I am not a licensed tax advisor, but with financial planning considerations encompassing some tax considerations, please consult your tax advisor for more information on these tips.
Before we discuss tax strategies for individuals and businesses, let’s take a look at some recent changes to the tax code:
- The standard deduction increased to $12,950 per taxpayer, with the head of household deduction rising to $19,400.
- The annual gift tax exclusion is $16,000 per person annually (previously $15,000 per person annually).
- The limitation for charitable giving has dropped back to 60% of AGI for cash contributions. Also, there will be no additional $600 deduction for those that take the standard deduction (previously 100% of AGI with up to $600 of an above the line deduction for MFJ taxpayers).
- SC passed the “Comprehensive Tax Cut Act of 2022” which provides a one-time rebate for each 2021 individual income tax return that reports a South Carolina individual income tax liability. As it currently stands, the rebate is equal to the amount of tax liability on the return, up to a max of $800.
Now let’s get into a few year end tax planning tips for individuals and businesses in South Carolina…
Tax planning tips for individuals
Given the tumultuous markets, inflation, and general economic difficulty we all have faced this year, there are some opportunities to lower your 2022 tax burden if you know where to look. We will list those and some other tips below to help individuals plan your year end tax strategy. It is important that you understand all of your options and act on them quickly, because the end of the year will be here before you know it.
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- Consider a “bunching strategy” to either pull or push medical expenses, real estate taxes, and/or charitable contributions into the year they will be most tax beneficial. If your itemized deductions are close to the standard deduction, boost your itemized deductions in one year, and take the standard deduction the next.
- Make gifts sheltered by the annual gift tax exclusion ($16,000) before the end of the year to reduce your estate and allow you to gift with no tax consequences.
- Given the market fluctuations this year and overall decline, consider harvesting capital losses to offset any current year capital gains. Unused capital losses can be carried forward indefinitely.
- Consider donating to the SC Exceptional Needs program to cover your SC tax liability. The fund is made up of tax-deductible donations that serve as scholarships for the private school tuition of exceptional needs students in SC. To obtain the credit, you may donate cash or appreciated securities. More information can be found on their website: https://www.exceptionalsc.org/donors/scholarship-fund/
- Consider contributing to a SC college savings 529 plan. Your contribution provides a full SC deduction. Contributions to a single beneficiary cannot exceed $540,000 in SC. The funds grow tax free, and you are not taxed on the earnings when you withdraw funds for education expenses. You can also withdraw up to $10,000 per year per child from a SC 529 plan for K-12 private education.
- Consider making Qualified Charitible Donations from your taxable retirement accounts to your favorite charity, such as your church or local non-profit. These donations will be considered part of your Required Minimum Distributions (RMD) and deemed by the IRS to be a non-taxable part of your income. Thus, this may reduce your tax liability by way of AGI deduction.
Note: Funding 529 plans is also a great estate planning tool. While you can only contribute up to $16,000 per beneficiary without triggering gift tax, the IRS allows you to front-load 5 years of the annual gift exclusion ($16K x 5 = $80K) without utilizing any of your lifetime estate exemption.
Tax planning tips for businesses
Small businesses can also ease their 2022 tax burden with year end planning. If you own a business in South Carolina, familiarize yourself with the list below, and then schedule an appointment with me to discuss your options further. It can be difficult to figure out the best strategies on your own. Book a Meeting.
- Analyze wages and net income for the year to maximize the 20% qualified business income deduction. The lesser of your taxable income or qualified business income will be your QBI deduction for the year.
- Major asset purchases can qualify for accelerated depreciation through Section 179 and 100% bonus depreciation. Assets need to be placed in service by 12.31.22. Bonus depreciation drops to 80% starting in 2023. Sec 179 does come with limits – there are caps to the total amount written off ($1,080,000 for 2022, and limits to the total amount of the assets purchased ($2,700,000 in 2022).
- Consider using a credit card to pay deductible expenses. Purchases made and placed in service by 12.31.22 are deductible.
- For businesses on the accrual basis, consider declaring year-end bonuses in 2022 that can be paid out in 2023 (must be paid by 3.15.23).
- Pay SC tax at the entity level by December 31 to receive a business tax deduction. The tax is 3% of your net income. If you paid this tax for 2021, we provided you with quarterly estimated vouchers to pay in 2022. Make sure you pay the Q4 estimate by year-end. Payment may be made on MyDORWAY (https://mydorway.dor.sc.gov). Additionally, some of the same SC credits that can be purchased at the individual level can also be purchased by businesses to pay their SC taxes.
It may have been a difficult financial year for some, which is all the more reason to take advantage of these year end tax tips. Begin planning your tax strategies now!
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A 529 plan is a tax-advantaged savings plan, issued and operated by a state or educational institution that helps families save for college. Investments in 529 plans are not insured by the FDIC or any other government agency and are not deposits or other obligations of any depository institution. Investments are not guaranteed and are subject to investment risks, including loss of the principal amount invested. Tax implications vary significantly from state to state. If you or the designated beneficiary is not a resident of the state offering a 529 plan, you may want to consider, before investing, whether your state or the designated beneficiary's home state offers its residents a plan with state tax advantages or other benefits. Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.