Year-End Considerations to Prepare for Your Individual Tax Filing

As the year draws to a close, we know there is a lot to do and think about! Many things demand our attention, including the holidays. We know the last thing on your mind is preparing for taxes because those are not due until April, right? However, it’s time to think about what you can do before year-end to ensure you are in the best position for filing your 2022 tax return.

We have compiled a list of items to think about and possibly prepare before December 31st.

1. Retirement Contributions

a. Payroll Deductions: Review your YTD retirement contributions and make potential payroll changes to ensure maximum contributions are made by the end of year or plan now to make potential 2022 contributions before filing taxes in 2023 where applicable. The maximum contribution for 401(k), 403(b), Profit-Sharing Plans, etc. for 2022 is $20,500 plus an additional $6,500 for catch up contributions for those aged 50 and over.

Don’t forget to ensure your beneficiaries for all your retirement plans are updated to factor in life changes (birth, marriage, death and/or divorce).

b. Small Business / Self Employed Retirement Plan Options:

• SEP – Plan can be established any time up to the due date of the employer’s return (including extension). The maximum contribution is $61,000.
• SIMPLE IRA and SIMPLE 401K – Plan must be established by October 1 of the calendar year. The maximum employee contribution is $14,000 ($3,000 Catch-up) and the employer can match up to 3% contributed by employee.

c. IRA Contributions: Total contributions for traditional and Roth IRAs in 2022 cannot exceed $6,000 ($7,000 if you are 50 or older). These limits do not apply to rollover contributions or qualified reservist repayments.

Please be aware that if your modified AGI is too high, you cannot make a direct contribution to a Roth IRA. Disallowed contributions to a Roth IRA should be withdrawn on or before the due date of your return, including extensions, to avoid penalties for excess contributions.

2. Health Savings Account Contributions

You should review health savings account contributions from prior years and plan to make current contributions before April 15, 2023 accordingly. Total Health Savings account contributions for 2022 are limited to $3,650 for one person and $7,300 for families.

3. Charitable Contributions

Have you considered the timing of your charitable contributions to make the most of your donations? Due to the increased standard deduction, it may be advantageous to bunch your contributions in one year to get the maximum benefit.

If 70½ or older, let us help you determine if making a Qualified Charitable Distribution (“QCD”) from an IRA would be a better charitable donation method. This may be especially advantageous if you are 72 or older and required minimum distributions (RMDs) are required.

4. Capital Gains

It may be a good time to sit down with your investment advisor to evaluate your realized and unrealized capital gains up until the current date. This can provide the opportunity to evaluate a benefit in potentially harvesting losses to offset the realized gains.

5. Life Changes

Properly documenting differences between tax years is another important step that needs to be taken when organizing the preparation of a tax return.

Life Events and Their Associated Documentation

• New Dependent – birth certificate and social security number
• Marriage- marriage license and spouses’ prior tax filings
• Change of Residency- Dates lived at previous and new location and make sure that employer has updated the address for tax forms
•  Death- Certificate of death
• New investments such as a rental property- Documents detailing purchase or sale of property and documents that detail expenses related to the business.
• Divorce- If a PA resident and divorce is not finalized by December 31, decide on filing status between married filing jointly and married filing separately. If filing single of head of household is desired in PA, a legal decree must be finalized by December 31.

6. Single Member LLC Tax Considerations

Owners of a single member LLC without any tax elections may want to consider electing for S-Corporation tax treatment for the coming year. In an S Corp, the owner of the entity is also an employee and only his/her wages are subject to FICA tax for Social Security and Medicare. The earnings and profits of the company can then be distributed to the owner, free of self-employment tax if the owner is an active participant in the entity.

In addition, the Tax Cuts and Jobs Act created another advantage for LLCs to make the S-Corporation election: the qualified business income deduction allows for pass-through businesses to receive 20% deduction from qualified business income provided they pay employee wages.

Please contact us for more information and to find out if you would benefit from making this election.

This article was written and contributed by our tax team colleagues at Holsinger P.C. , under direction of senior tax manager, Jessica Moslander. This information is not meant as tax advice but merely an informative piece. We are happy to consult with you and provide detailed guidance given your unique situation to make the best possible tax position for the upcoming filing. Please feel free to contact us with your questions and to schedule a consultation.