With year-end approaching, it is time to start thinking about moves that may help lower your tax bill for this year and next. This year’s planning is more challenging than usual due to recent changes made by the Inflation Reduction Act of 2022 and the potential change in congressional balance of power resulting from the midterm elections. Additionally, pending legislation is wending its way through Congress with three bills representing the basis for proposed retirement plan reform commonly known as SECURE Act 2.0. Uncertainties aside, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for most taxpayers. We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end.

• Depreciation rules for businesses. Businesses should consider purchasing assets and placing them in service prior to year-end. Between the new Section 179 limit of $1,080,000 and favorable rules regarding 100% bonus first year depreciation, most assets placed in service before the end of the year will be eligible to be fully expensed in 2022. Note that bonus depreciation is scheduled to be reduced to 80% in 2023 and phased out by the end 2026.

• Arizona Tax Credits. Contributions to charities that qualify for the various Arizona (“AZ”) Tax Credits (listed below) generate a dollar-for-dollar state tax credit. While these no longer qualify for the federal charitable deduction, taxpayers who itemize deductions and whose state and local taxes paid are less than $10,000 can still get the extra benefit of a federal itemized deduction in addition to the state tax credit. Either way these are still valuable tax planning tools. You can contribute to one or more of the following:

The public school tax credit for donations to qualifying public schools allows a maximum credit of $200 ($400 if married filing jointly (“MFJ”)).

The private school tax credit has two parts. The basic part allows a maximum credit of $623 ($1,245 if MFJ). Additionally, a ‘switcher’ credit of $620 ($1,238 if MFJ) is also allowed, bringing the combined total to $1,243 ($2,483 if MFJ). You can make both parts of your contribution to the same private certified school tuition organization.

The Charitable tax credit for donations to charities that assist the Working Poor allows a maximum credit of $400 ($800 if MFJ).

The Foster Care tax credit for donations to qualifying foster care organizations allows a maximum credit of $500 ($1,000 if MFJ).

Lists of qualifying organizations appear on the ADOR website https://azdor.gov/tax-credits.

For the school, charitable and foster care credits, qualifying contributions made between January 1, 2023, and April 15, 2023, can be used as a tax credit on either your 2022 or 2023 AZ income tax return.

The AZ Military Family Relief Fund tax credit. This popular credit of $200 ($400 if MFJ) is administered by the AZ Dept of Veterans’ Services. Annual donations to the fund are capped at $1 million. At this time online donations are still being accepted at https://dvs.az.gov.

• Contributions to 529 College Savings Plans. We mentioned this in our 2021 Year-End Planning newsletter, but it bears repeating. AZ has substantially increased the deduction for 529 Plan contributions to $2,000 per beneficiary ($4,000 if MFJ). For example, a married couple contributing $4,000 to each of their five grandchildren’s 529 accounts can claim a $20,000 deduction on their AZ tax return. The old rule capped the total deduction at $2,000 ($4,000 if MFJ).

• Annual Gift Tax Exclusion. For 2022, up to $16,000 of gifts made by a donor to each donee is excluded from the amount of the donor’s taxable gifts. The exclusion increases to $17,000 in 2023. A gift is not a tax deduction for the donor, nor is it taxable income to the donee. Tuition payments made directly to an educational institution and medical expenses paid directly to a medical care provider don’t count toward the annual gift tax exclusion amount.

• Consider converting all or part of your traditional IRA into a Roth IRA. Clients interested in converting a traditional IRA to a Roth IRA should consider converting traditional-IRA money invested in any beaten-down securities into a Roth IRA in the current year. Distributions from a Roth IRA can be tax-free, but the conversion is taxable. With proper planning you may be able to take advantage of unused lower tax brackets. We can consult with your investment advisor to coordinate tax & financial planning.

• Tax Loss Harvesting. Given the stock market troubles in 2022, if you are holding onto stocks or mutual funds in nonqualified accounts (i.e. not a retirement account, annuity, or other tax deferred account), and have lost value since original purchase, work with your financial advisor to consider selling before year-end to capture capital losses for tax purposes. Even if you don’t have current year capital gains to shelter, individuals generally may deduct $3,000 of capital losses against ordinary income. Additionally, any unused capital losses can be carried forward indefinitely to be used in future years.

• For wage paying business owners. Effective January 1, 2023, Arizona’s Unemployment taxable wage base will increase from $7,000 to $8,000. Be sure your payroll tax software is updated so you are paying Unemployment Insurance on the first $8,000 in gross wages paid to each of your employees.

• Energy Credits. The Inflation Reduction Act of 2022 adds some new energy tax credits & modifies some preexisting rules starting in 2023. The rules are complex and the details are beyond the scope of this newsletter. Feel free to contact us for specifics. Here is a brief summary:
1. Replaces the lifetime credit cap of $500 with a more generous annual credit cap of $1,200 for various energy efficient improvements to your 1st or 2nd home. Examples are windows, skylights, doors, air sealing materials, etc. Also, energy audits on primary residences qualify for the credit.
2. Separate $2,000 credit applies to heat pumps, heat pump water heaters, biomass stoves & boilers.
3. Solar electric, solar hot water, and battery storage technology may be eligible for a 30% credit.
4. Clean Vehicle Credit has been revamped, including eliminating manufacturer model limits and requiring final assembly occur in North America. Qualifying used vehicles can be eligible. On the flip side limits based on adjusted gross income and vehicle retail price have been implemented.

The tax planning strategies mentioned in this letter are general suggestions that may not apply to every taxpayer. Please feel free to contact us to discuss your specific tax situation. By doing year-end tax planning now, we can take a proactive approach to reducing your taxes, rather than just being reactive.