By Joe Marmorato, CPA

While many CPAs will have their heads buried in 2021 tax documents for the next few weeks, it is imperative not to lose sight of the future and helping clients make tax plans for this year. Monitoring your clients’ financial situation more regularly throughout the year can help ensure they are on the right track and avoid unwelcome surprises in the future.

Here are some important items to consider for your clients in 2022.

Expired Tax Provisions

Keep in mind the tax laws that expired last year. Your clients may no longer be able to take advantage of certain deductions and credits they once relied on. Some tax provisions that expired on Dec. 31, 2021, include the following:

• Advance Child Tax Credit
• Expansion of the Earned Income Tax Credit
• Expansion of the Dependent Care Credit
• Recovery Rebate Credit
• 100% limit on eligible cash contributions

The loss of these credits and deductions can play a significant role in determining appropriate estimated tax payments or withholding allowances for 2022, so be sure to plan accordingly.

Increased Limitations

Every year, the IRS updates limitations for various provisions to keep up with inflation. As a result of the current inflation rates, there have been several notable increases for the 2022 tax year:

• 401(k) contributions increased to $20,500
• Health Savings Account contributions increased to $3,650 for individual plans and $7,300 for family plans
• The estate tax exemption increased to $12.06 million
• The annual exclusion for gifts increased to $16,000

As you reconnect with clients during tax season, inform them of these changes to ensure they are taking advantage of the increased allowances as appropriate.

Charitable Giving

For clients who are charitably inclined, consider having them gift highly appreciated stock. Gifting appreciated stock not only may give them the benefit of an itemized deduction, but it also allows them to avoid paying capital gains tax on the appreciation. For clients looking to rebalance their portfolios, donating securities can be a tax-efficient way of getting this done.

For those individuals who have reached age 70.5 and own a traditional IRA, consider advising them to use their retirement funds to make donations through Qualified Charitable Distributions (QCDs). As many clients no longer itemize deductions because of the Tax Cuts and Jobs Act of 2017, a QCD is a way to provide an additional income tax break for those with required distributions who claim the standard deduction.

Roth Conversions

With historically low tax rates, it may be time to look into Roth IRA conversions. A Roth conversion will allow clients to transfer funds from a traditional tax-deferred IRA to a tax-free Roth IRA. The switch will require clients to pay income taxes on the amount that was converted, but the benefits of a Roth IRA are significant as it eliminates taxes entirely on both earnings and future distributions. There are no annual required minimum distribution requirements for a Roth IRA, and clients are able to pass the account to their heirs free of income tax.

Another strategy to consider is the backdoor Roth contribution. This allows taxpayers to fund a Roth IRA even if their income is too high to qualify for a direct Roth IRA contribution. To accomplish this, the taxpayer would contribute to a nondeductible traditional IRA and immediately convert this contribution to a Roth account. As long as the client does not have any pre-tax dollars in their IRA, there should be no income tax liability on the conversion. Congress is looking to prohibit these transactions, so look to complete a backdoor Roth IRA strategy soon as 2022 may be the last year clients will be able to take advantage of this opportunity.

2022 Tax Reform?

If there is anything to keep a close eye on in 2022, this is it.

Despite a setback in late 2021, Democrats in Congress are expected to continue to pursue a version of President Biden’s Build Back Better legislation this year, which likely will include some tax measures. In the Build Back Better legislation passed in the House of Representatives in November 2021, there were new rules around retirement accounts, expanded credits, high-income surtaxes, an increase in the $10,000 state and local tax cap, and several other proposals.

The Senate is drafting its own version that likely will be different than the one passed in the House. Any tax provisions in this new bill may become effective on the date of enactment, or may even be retroactive. Be sure to stay current on this legislation as it could have a significant impact on your clients’ 2022 tax planning strategies.

Plan Ahead

Every client’s tax situation is unique, so it is important to consider each individual’s circumstances when evaluating tax strategies. A lot can happen in a year, so it’s always a good idea to stay current with pending legislation and to keep your clients in mind beyond tax season. Make sure that they are taking advantage of the best tax planning options available to them.

Joe Marmorato, CPA, is manager of tax planning with Domani Wealth in Lancaster, Pa. He can be reached at joe.marmorato@domaniwealth.com.

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