2022 Year-end Tax Planning

NOTE: This newsletter is issued annually to provide you with information about preparing for and minimizing your taxes. Do not apply this general information to your specific situation without additional details. Be aware that the tax laws contain varying effective dates and numerous limitations and exceptions that cannot be summarized easily. For details and guidance in applying the tax rules to your individual circumstances, please contact us.

Dear Clients and Friends,

What a wonderful year it has been. With it coming to a close, it is extremely important to analyze your taxes for 2022 and prepare for 2023. This is the time of year to tie up the loose ends and implement tax-saving strategies to avoid any surprises on April 15^th. Tax law is a vast topic and contains too many complicated provisions to cover in one letter. Our intent is to review some of the changes you may have missed and highlight some strategies that can be implemented to reduce your tax burden.

Before we jump into tax planning, we wanted to let you know that we have a new CPA, Rick Johnson, and a new receptionist, Molly Williamson, who are excited to meet and work with you all.

Now back to the tax planning. This letter is intended to remind you that tax planning is a process, and successful planning favors the prepared. It is important to weigh the risks and rewards of tax-saving strategies you can make now while maintaining the ability to respond rapidly and effectively.

Also, there is a possibility that congress may pass additional laws that will affect the 2022 taxes. We will do our best to keep you informed of any of these changes as quickly as we are able.

Tyson Haws, CPA
tyson@foxpeterson.com
David Hakes, CPA
david@foxpeterson.com
Rick Johnson, CPA
rick@foxpeterson.com

Dason Hatch, CPA
dason@foxpeterson.com
Rachel Hutzler, CPA
rachel@foxpeterson.com
Nathan Wilding
nathan@foxpeterson.com

Reminders and Some Changes…

Tax Rates and Brackets – Like last year, the tax bracket rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The capital gain rates stayed at 0%, 15%, and 20%. NIIT is 3.8%.

AZ Tax Rates – These rates have gone down from the past and are 2.55% or 2.98% for 2022. The 2023 tax rate will go to a flat tax of 2.5% barring any legislative changes or challenges in court. All employers by January 31, 2023 are required to give employees a new Arizona Form A-4 to adjust their Arizona withholdings. If an employee does not chose a new rate then employers are required to change your withholdings to the default of 2%. This automatic adjustment in withholding could affect you.

Exemptions and Standard Deduction – The standard deduction amounts have increased to $25,900 (MFJ), $19,400 (HOH) and $12,950 (Single/MFS). If your itemized deductions are less than these amounts, you get the benefit of the larger standard deduction.

Dependent Credits – The child tax credit has reverted back to $2,000 for each qualifying child 17 years old or under. The phase out threshold for this credit is at an AGI of $200,000 ($400,000 MFJ). There is also a $500 nonrefundable tax credit for dependents that do not qualify for the child tax credit (i.e. children older than 17 and other dependents who meet all the requirements).

Deductions – We still need to accumulate the information on your 1) medical, 2) state income and property tax, 3) mortgage interest, 4) charity and other deductions in order to apply the latest rules, and to complete your state tax returns. The AGI limitation back to 60% of AGI this year, so please let us know of all cash contributions you made in 2022.

Employee work related business expenses are still not deductible on the Federal return. If you incur a lot of these types of expenses, you need to discuss the use of an accountable plan with your employer.

IP PIN – If someone filed a fraudulent tax return using your information, the IRS can give you an Identity Protection PIN (IP PIN) to include on your tax return. You receive a new number each year and the tax return cannot be electronically filed without it. The IRS has created a portal where you can opt into the program. The IP PIN portal can be found at https://www.irs.gov/identity-theft-fraud-scams/retrieve-your-ip-pin. We strongly recommend requesting the IP PIN. Once you are in the program, be sure to keep the annual letter from the IRS with your tax files.

Planning Opportunities

In the current tax era of greatly increased requirements to itemize deductions, a tax “bunching” strategy is absolutely mandatory. The “bunching strategy” recognizes that the best tax deductions are obtained by putting deductions in one year rather than spreading them amongst several years. For example, in years where your charitable contributions are very low, hold off until the next year to catch up, then also pay the full amount of the next year’s contributions in the “catch up” year in order to double your chances of itemizing. Similarly, few Americans receive medical deductions anymore, but if you incur a large expense for say, the deductible on surgery, then try to do all of your other medical items in the same year, such as dental and vision exams, check-ups, etc.
If you have a Health Savings Account it is also mandatory that you deposit some amount into it, and do not let the balance drop to zero. The tax savings benefits are incredible and this is one of the single best plans available. For tax year 2022, maximum contribution amounts are $3,650 for self-only and $7,300 for families and can be made up to April 18, 2023.
Every year we are told “I pay too much in taxes” or “I want some of the tax loopholes that rich people get”. We can answer both statements with one answer. Rich people get no more tax deductions or “loopholes” than anyone else, they just take advantage of what is there to keep their taxes at a low legal level. The single greatest tax “loophole” that they use, which few average people use to its limit is the ability to defer $20,500 into a 401(k) if your employer has one. If your employer has a 401(k) and you are not putting the maximum deferral in it, there is no reason to even think about other tax planning ideas. If your employer does not offer a 401(k), there are other retirement accounts available, such as a traditional IRA. Depending on which type of retirement account you take advantage of, some contributions can be made as late as April 18, 2023.
Check into your employer’s handbook to see what employer provided fringe benefits are available. Taxpayers are often surprised at the available benefits, or at our explanation of what some benefits really mean.
There have been no major changes to the Estate Tax thresholds. Congress has discussed the idea of lowering the non-taxable limits and could potentially make a change before the end of the year. If any significant changes are made, we will send an updated letter. For 2022, the annual gift tax exclusion amount is $16,000.

Given the broad nature of tax reform, this letter barely scratches the surface. Financial positions change on an annual basis, and effective tax planning requires a year-round effort. If you wish to discuss the provisions affecting you as well as the available tax strategies that would be appropriate to minimize your tax liability and maximize your tax savings, please give us a call at 480-898-7640 to set up an appointment.

Sincerely,

Fox Peterson

Tax Items Affecting Businesses

Payroll Delayed Deposit – Employers are allowed to defer the deposit and payment of the employer share of Social Security taxes from 3/27/20 until 12/31/20. Self-employed individuals could defer the payment of certain self-employment taxes. The deferral would be reported on payroll tax filings. All employees are eligible. 50% of the deferred amount is due 12/31/21 and the remainder is due 12/31/22.

Mesa General Business License – January 3, 2022 the Mesa City Council approved a new general business license. The purpose for this change is to help enhance the communication they have with business owners and allow information to reach operating businesses in a timely manner. Beginning Jan. 3, most businesses will need to apply for a license to do business in Mesa. During the 2022 roll out of this new license, the city will be focused on educating the business community about the change and the value of becoming registered. Late fees and other penalties have not been determined, though there will eventually be some if you fail to apply or renew each year. Though we do not know a lot about this change, you can visit their website to view frequently asked questions and complete the process to apply for your business license. A link to their website has been provided. https://www.mesaaz.gov/business/licensing/mesa-general-business-license

Employee Retention Credit (ERC) – We have received many questions about the Employee Retention Credit (ERC) and there is a lot of information out there so we want to clarify what it is. There are companies that have been formed as a result of this credit and all they do is help you qualify for it and the promise a lot of money with audit guarantees. We caution you in using those types of companies because we aren’t sure if they are doing things properly on your behalf. Below are the guidelines for claiming the ERC and we can assist you in filing for the ERC properly. If someone is advising you differently from these guidelines then you should proceed with caution.

The ERC is a fully refundable tax credit for a percentage of the qualified wages you pay employees, not wages paid to owners. It is applied to your federal payroll tax liability. It is claimed by amending the 941 reports filed. You become eligible for this credit if your business was fully or partially suspended for any calendar quarter in 2020 or 2021 due to governmental orders due to COVID-19 or your business experienced a significant decline in gross receipts during a calendar quarter in 2020 or 2021. The definition of a significant decline in 2020 is 50% decrease in gross receipts compared to the same calendar quarter in 2019. The definition of a significant decline in 2021 is 20% decrease in gross receipts compared to the same calendar quarter in 2019.

For 2020, the ERC is 50% of all qualified wages you paid employees between March 13, 2020 and December 31, 2020. It is limited to $10,000 in wages per employee. The max credit per employee for 2020 is $5,000.

For 2021, the credit is 70% of all qualified wages you pay employees from January 1, 2021 to September 30, 2021. It’s limited to $10,000 in wages per employee for any quarter. Therefore, you can claim up to $7,000 for each employee in each quarter. The max credit is $28,000 per employee.

To see if this is something your business is eligible for, we would need to see comparisons of your gross income or what government order shut your business down. We will also need payroll reports broken down by employee by quarter to give you an accurate amount you may be eligible for.

If you feel that you qualify or would like to see if you qualify, please schedule an appointment with Dani Lyn at www.foxpeterson.com/contact. Our fee to see if you qualify is $150. If you do qualify, Dani Lyn will give you pricing to file all necessary forms and to amend your tax returns.

2022 Year-end Tax Planning