The end of the calendar year is fast-approaching, and it will be tax season again before you know it. 

As tax professionals, one of our primary goals is to help our clients optimize their tax situations. Everyone’s situation is unique, but it is wise for every taxpayer to begin their final year-end planning now! Choosing the appropriate tactics will depend on your income, as well as a number of other personal circumstances.

Whether you are filing taxes independently or as a business owner, having a careful strategy in place will give you some much-needed peace of mind.

Here are some of the most important items to consider.

Evaluate the use of itemized deductions versus the standard deduction.

For 2022 tax returns, the standard deduction amounts will increase to $12,950 for individuals and married couples filing separately, $19,400 for heads of household, and $25,900 for married couples filing jointly and surviving spouses.

The Tax Cuts and Jobs Act (TCJA) enacted in 2017  roughly doubled the standard deduction. Its goal was to decrease tax payments for many of those who typically claim this standard deduction. Although personal exemption deductions are no longer available, the larger standard deduction, combined with lower tax rates and an increased child tax credit, could result in less tax. You should consider running the numbers to assess the impact on your situation before deciding to take itemized deductions. 

The TCJA still eliminates or limits many of the previous laws concerning itemized deductions. An example is the state and local tax deduction (SALT), which is still currently capped at $10,000 per year, or $5,000 for a married taxpayer filing separately.

Consider bunching charitable contributions or using a donor-advised fund.

For those taxpayers who are charitably inclined, it makes sense to have a plan for giving. One way to utilize the tax advantages of charitable contributions is through a strategy referred to as “bunching.” Bunching is the consolidation of donations and other deductions into targeted years. That way, in those years, the deduction amount will exceed the standard deduction amount. 

Another strategy is to consider using a donor-advised fund. A donor-advised fund, or DAF, is a philanthropic vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax benefit, and then recommend grants from the fund over time. Taxpayers can take advantage of the charitable deduction when they’re at a higher marginal tax rate, while actual payouts from the fund can be deferred until later. It can be a win-win situation.

Review your home equity debt interest.

For mortgages taken out after October 13, 1987, and before December 16, 2017 (i.e., enters into a binding contract by that date), mortgage interest is fully deductible up to the first $1,000,000 of mortgage debt incurred to acquire or improve a qualified residence. The TCJA lowered the threshold to $750,000 or $375,000 (married filing separately) for homes purchased after December 15, 2017, but before January 1, 2026.  All interest paid on any mortgage taken out before October 13, 1987, is fully deductible regardless of your mortgage amount (“grandfathered debt”). Many mortgage holders refinanced for lower rates or to cash out in the last few years, so remember, to the extent debt increases the interest might not be deductible.  

Interest on home equity lines of credit (HELOCs)  and cash-out refinancings may be deductible as well, if the funds were used to improve the home that secures the loan (or if the proceeds were invested). Please share with your tax preparer how the proceeds of your home equity loan were used. If you used the cash to pay off credit cards or other personal debts, the interest isn’t deductible, but that may change when the TCJA sunsets at the end of 2025.

Revisit the use of qualified tuition plans.

Qualified tuition plans, also named 529 plans, are a great way to tax efficiently plan the financial burden of paying tuition for children or grandchildren to attend elementary or secondary schools. Earnings in a 529 plan originally could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools, or other post-secondary schools. However, 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year.  Unlike IRAs, there are no annual contribution limits for 529 plans. Instead, there are maximum aggregate limits, which vary by plan. Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary's qualified higher education expenses. Limits vary by state. Some states even offer a state tax credit or deduction up to a certain amount.  

Contributions to a 529 plan are considered completed gifts for federal tax purposes. In 2022, up to $16,000 per donor (per beneficiary) qualifies for the annual gift tax exclusion. Excess contributions above $16,000 must be reported on IRS Form 709 and will count against the taxpayer’s lifetime estate and gift tax exemption amount ($12.06 million in 2022).

There is also an option to make a larger tax-free 529 plan contribution, if the contribution is treated as if it were spread evenly over a 5-year period. For example, a $80,000 lump sum contribution to a 529 plan can be applied as though it were $16,000 per year, as long as no other gifts are made to the same beneficiary over the next 5 years. Grandparents sometimes use this 5-year gift-tax averaging as an estate planning strategy.

Maximize your qualified business income deduction (if applicable).

One of the most talked-about changes from the TCJA is the qualified business income deduction under Section 199A. Current proposals want to change this deduction, but for 2022, taxpayers who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20% of their qualified business income. Please be careful, because this deduction is subject to various rules and limitations.  

There are planning strategies to consider for business owners. For example, business owners can adjust their business’ W-2 wages to maximize the deduction. Also, it may be beneficial for business owners to convert their independent contractors to employees where possible; but before doing so, please make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies can include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. This piece of the tax code is complicated, so if you are a business owner, talk with a qualified tax professional about how this new Section 199A could potentially work for you.

Whether filing taxes individually or as a business owner, having a game plan can help you make the most of your tax situation for year-end and beyond!