Mo Vidwans
By Mo Vidwans
I know nobody likes to even think about it, but it will do you a whole lot of good if you just pause now for a moment or two and think about your taxes for 2022 because the time will arrive soon to file them. The reason for reviewing them now is very simple. Once the year is over there is really very little (except maybe IRA payments) you can do to improve your tax situation for 2022. There is a lot you can do for 2023 but that is a subject for another time.
Tax planning is an equally important part of your tax filing activity and the more attention you can give it, throughout the year, the better off you will be. Right now, we still have a month to do something about it; so, let us hunker down and take full advantage of the time we have left.
I am going to devote this column to individual taxes only because it affects all of us, but there is also much to discuss about small businesses.
Rules have changed quite a bit for 2022; the previous two years were treated differently because of Covid and employment/economy issues and most of those special concessions have evaporated now. There is no Stimulus check any longer, the deductibility of donation of $600 per married couple, even if you didn’t itemize, has disappeared and the child tax credits have gone down considerably. They have gone back to what they always were.
One quick decision that everyone must make is if they should be claiming itemized deduction or take standard deduction. Because of the new law passed in 2017 (TCJA), the standard deduction has gone up considerably for both single and married families and hence the number of taxpayers who can claim itemized deduction has gone down, which was the intent of the law. However, if you have considerable mortgage interest payments or donations or medical expenses beyond the 7.5 percent of your AGI, you still have a good chance to exceed their limit. By managing the last and first month’s mortgage payment of the year, by deciding when to pay your property taxes, by judiciously deciding which year you wish to take the donations, you can cross the limit one year and go for itemized deduction and take standard deduction the next.
The 2022 dependent care credit for working families is smaller than 2021. That is simply because last year’s covid-relief enhancements have expired. For 2022, the maximum credit is $1,050 for one child and $2,100 for two or more children needing care; this is down from 2021 credit of $4,000 and $8,000 respectively. Also, the income phaseouts for credit eligibility decreased to pre-2021 levels. The expenses are for the care of children under 13 and qualifying relatives and must be incurred so that you can work or look for a job and you must report the provider’s tax ID number on form 2441.
For those who can and do take RMD, considering a Qualified Charitable Donation (QCD) is a good solution to reducing taxes. It is taken out directly from your gross income and hence reduces the taxable income and taxes due. This works out well for those who are not able to itemize but still wished to donate.
If you plan to or already have donated a car to charity this year, then IRS Publication 4303 explains the tax rules on vehicle donations. I am sure you have noticed that the rules for car donations have tightened considerably. The donor’s charitable deduction generally can’t exceed the proceeds the charity gets from selling the auto. Donor’s may use a fair market value in only four situations described in Pub. 4303. It explains when form 8283 must be filed (for donated cars with a value of $500 or more) and when an appraisal is needed (for charitable write-offs over $5,000).
Summer is a prime time for natural disasters such as hurricanes, tornadoes, widespread flooding, and wildfires. Even though at this moment we are below average for such events the season is not over for North Carolina until the end of November. But it helps to know the tax laws and IRS can help if your home, business or belongings suffer damage from a federally declared disaster this year. As a rule, you can deduct losses to the extent you are not reimbursed by the insurance. More information is available. IRS also gives disaster victims more time to file returns and pay taxes.
One area I wanted to specifically highlight is when you have accounts and/or property in a foreign country. The IRS and the Justice Dept. are on the prowl for undisclosed foreign accounts. You probably may not have noticed but there are three questions at the bottom of schedule B which you are supposed to answer honestly and truthfully and if there is more work to be done or more forms to be filled then do that accordingly (generally, a FBAR form FinCEN Form 114). I will urge you to declare all the information they are asking. Currently there are penalties only if such information is not disclosed; omitting an account from a filed FBAR leads to a willfulness penalty. Also, there is a certain procedure to be followed when funds, after selling your property in India (or any other country), are transferred to US; basically, it impacts your 1040 and all that information is to be shown on 1040 for that year. Rest assured that you do not pay income tax twice; you pay taxes just in one country of your choice.
Mo Vidwans is an independent, board certified financial planner. For details visit, vidwansfinancial.com, call 984-888-0355 or write to: [email protected]
