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2022 Year-End Roundup Highlights

Written By: Jill Ashley, CPA

  Jill Ashley is a 2^nd year law student at Stetson University College of Law with a Business Law concentration, and a law clerk at Gassman, Crotty & Denicolo, P.A., in Clearwater, Florida.  She previously earned degrees in communications and accounting, and was a self-employed CPA and Series 65 independent investment advisor, and Sr. Wealth Manager for Global Trust Asset Management, LLC, before embarking on her 3-year journey in 2021 to earn her J.D. in lieu of retirement.

 

Will Rogers once declared, “The only difference between death and taxes is that death doesn’t get worse every time Congress meets.” When Congress finished wrangling over language related to the location of new FBI headquarters, the Omnibus bill was released on December 23^rd – all 4,155 pages detailing $1.7 trillion of appropriations.

Here are just two categorical highlights:

Retirement Plan Provisions

Beginning in 2023, small businesses (having up to 50 employees) will be eligible for a 100% tax credit toward qualified costs to establish or administer new pension plans. The plan must have at least 1 participant who is not a Highly Compensated Employee (paid $150,000 or more compensation). Qualified startup costs include expenses to set up and administer a qualifying retirement plan, and educate employees about the plan. The tax credit is limited to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-Highly Compensated Employees eligible for participation or (b) $5,000. This credit is available for up to three years.

Beginning in January, 2023, mandatory Required Minimum Distributions (RMDs) from retirement plans may be deferred until individual account owners born in 1950 turn 73. Beginning in January, 2030, mandatory Required Distributions may be deferred until account owners born in 1957 turn 74. Beginning in January, 2033, the beginning Required Minimum Distribution age is slated to rise to 75 for account owners born in 1958 or later.

Workers age 50+ who are eligible to contribute to IRAs may contribute an extra $1,000 “catch up” contribution for years 2022 and 2023. The maximum base contributions allowed for IRAs is $6,000 for tax year 2022, and increases to $6,500 for tax year 2023. Contributions properly designated as 2022 contributions may be made by the earlier of this year’s tax filing deadline of April 18, 2023, or the date you file your tax return taking the deduction, if prior to April 18, 2023.

Workers age 50+ participating in 401k plans may contribute an extra “catch up” contribution of $6,500 for tax year 2022, and $7,500 for tax year 2023. The maximum base contributions for 401ks are $20,500 for tax year 2022, and increases to $22,500 for tax year 2023. After 2023, these amounts will be increased with inflation. Beginning in 2025, the “catch up” amount increases to $10,000.

For self-employed individuals whose income phases-out deductible IRA contributions (see chart below), and who seek higher contributions than permitted by 401ks may consider establishing a Defined Benefit Plan covering the individual and spouse working in the business. Defined Benefit Plans are normally designed by third party pension administrator to maximize the participant’s future benefit using complex calculations based upon salary history, age, and anticipated retirement date, and those plans require annual filings with IRS to report year-end valuations and activity.

 

Modified Adjusted Gross Income (MAGI) limits for deducting contributions to Traditional IRAs
Tax Filing Status		MAGI	Allowed deduction
a.	Single individuals who are active participants in a qualified plan at work.	$ 73,000 or less	100%
		$ 73,001 to $83,000	Partial
		$ 83,001 or more	None
b.	Married couples filing jointly if the spouse who makes the IRA contribution is an active participant.	$ 116,000 or less	100%
		$ 116,001 to $ 136,000	Partial
		$ 136,001 or more	None
c.	IRA contributor who is not an active participant and is married to someone who is an active participant.	$ 218,000 or less	100%
		$ 218,001 to $ 228,000	Partial
		$ 228,001 or more	None
d.	Married individual filing a separate return who is an active participant.	Less than $10,000	Partial
		$10,001 or more	None

 

One of the heaviest IRS penalties is assessed on individuals who forget to timely take their Required Minimum Distributions. Previously, the IRS assessed 50% penalties on the amount of missed or under-paid distributions. Beginning in 2023, the penalty is reduced to 25% of the underpayment, or 10% if the necessary funds are withdrawn by the end of the second year after the distribution was due.

For charitably inclined individuals, up to $100,000 of an account owner’s IRA may still donate directly to a qualified charity as a Qualified Charitable Distribution (QCD) to reduce taxable income on the withdrawal while satisfying the corresponding withdrawal amount toward their Required Minimum Distribution for the year. The SECURE 2.0 Act allows the $100,000 to be adjusted for inflation beginning in 2024. Additionally, beginning in 2023, the Act allows up to a $50,000 one-time Qualified Charitable Distribution to fund a taxpayer’s charitable remainder annuity trust, charitable remainder unitrust, or charitable gift annuity and count toward the taxpayer’s Required Minimum Distribution for the year. 

Section 179 Expense for Businesses

The following summarizes the Section 179 rules which have not changed, but reflect inflation adjustments for 2023.

Under Section 179 of the Internal Revenue Code, businesses may continue to elect to deduct 100% of the cost up to $1,080,000 of qualifying property placed in service during the year 2022 (or $1,160,000 in tax year 2023). The immediate tax deduction is available on the full cost even if the business financed the purchase over time.

The Section 179 deduction is allowed to the extent of current year profits, and the deduction is reduced dollar-for-dollar to the extent that qualifying property purchased exceeds $2,700,000 during the 2022 (or $2,890,000 in tax year 2023). Qualifying property includes furniture, fixtures, equipment, and most off-the-shelf software which is used more than 50% in the business.

Since Section 179 expense is limited to the business entity’s taxable income, any excess deduction may be carried over to future tax years. Controlled groups of corporations with 80% or more common ownership must allocate the maximum deduction among the controlled companies. For pass-through entities such as S-Corporations, Partnerships, and LLCs, the Section 179 expense flowing to a business owner’s personal tax return is further limited to personal taxable income, and cannot be carried over; the excess deduction is “lost” when the owner does not have sufficient personal taxable income to utilize the deduction passed through.

If you need a vehicle for business operations, purchasing an SUV weighing more than 6,000 pounds may trigger a larger deduction than smaller, lighter vehicles which constitute “listed property” with first year depreciation deduction limited to $27,000 for year 2022 (or $28,900 for 2023).

If your business leases a passenger vehicle with a value exceeding $56,000, the lease expense deduction triggers a formulaic inclusion in gross income. See IRS Pub 15-B for vehicle valuation tables and IRS Pub 463 for annual income inclusion tables.

Business owners should note that claiming 100% business use of non-commercial vehicles may raise an audit red flag. Business vehicles are listed as line-items on depreciation schedule Form 4562 to report the percentage of business use during the year. Businesses should keep detailed mileage logs and calendar entries documenting the business purpose of road trips. Alternatively, businesses may take deductions using the IRS’ standard mileage rate in lieu of claiming actual expenses for fuel, maintenance, insurance, and depreciation.