Tax planning is an endeavor that is constantly in mind for practitioners as they engage with clients. But it typically takes on added importance as the year winds down. Particularly with new legislation — such as the Inflation Reduction Act that passed in August — there are many issues that taxpayers need to be alerted to. While most don't take effect until 2023, tax advisors will be expected to alert their clients to issues affecting them.
This is important not only to provide quality service to the client, but because failure to do so could expose the advisor to liability claims if their client missed an opportunity as a result of their tax professional failing to notify them, according to Deb Rood, risk control consulting director for CNA, the underwriter for the AICPA Professional Liability Insurance program.
"Almost two-thirds of professional liability claims are for failure to properly advise clients or for providing incorrect advice," she said. "The IRA has many tax provisions, and CPAs need to alert their clients to the opportunities. If they don't, a claim might arise."
Due to the state of the economy, this is not a normal year for end-of-year tax planning, according to Jim Daniels, tax partner at Top 100 Firm UHY LLP and a managing director with UHY Advisors NY, Inc.
"The status of the stock market and the potential of moving into a recession has overshadowed a lot of the discussions," he said. "A lot of folks' portfolios are really down this year, so the usual concern about offsetting capital gains might be the reverse," he observed. "This year the losses are there, and the question is whether there are any gains that can be utilized against the losses."
"Asset values are down, so this might be a good time to move assets out of an estate," he noted. "The current exemption for a taxable estate is $12 million, but that's scheduled to sunset at the end of 2025 and go down to $6 million. Part of estate planning would be to use the higher exemption before the end of 2025. It's an opportune time to get assets out of an estate, although in my life, we've never gone back to the previous exemption."
And for those who have a long-term plan to remove assets from their estate, the annual exclusion, currently at $16,000 per donee, will be raised to $17,000, or $34,000 for married couples. Thus, a married couple with three children could gift $34,000 to each, for a total of $102,000, without affecting their estate tax exemption.
"For the rank and file, the brackets will broaden because of the inflation rate, so that will give some relief for those taxpayers," he said. "Also, the standard deduction will be higher to reflect the inflation rate."
Charitable contributions, typically planned toward the end of the year, will likely be lower this year due to less discretionary income, Daniels observed. The $300 amount allowed ($600 for married couples) without itemizing was allowed for the 2021 tax year, but is not available for 2022.
Green credits
Effective dates in the Inflation Reduction Act are important, particularly in the green energy provisions, according to Dan Gayer, tax senior manager at Top 100 Firm Baker Newman Noyes. "Practitioners should zero in on effective dates when preparing to meet clients toward the end of the year," he said.
For example, for single taxpayers earning over $150,000 and for married couples making more than $300,000, there's a limited window of opportunity, because beginning on Jan. 1, 2023, people over these thresholds will not be able to qualify for the electric vehicle credit or rebate. "It's an opportunity for someone with over that amount of income to take advantage of the credit before the income limitations kick in," Gayer explained. "The challenge will be to actually find a vehicle in the make and model they want with U.S.-sourced components."
The home energy efficiency improvement credit has been expanded from a $500 lifetime cap to an annual $1,200 cap, so it's much more useful, Gayer observed. "It has been increased to $2,000, specifically for heat pumps, so if a taxpayer is thinking about adding heat pumps they should definitely wait until 2023. They may want to consider breaking up a project into multiple tax years. They could start a project late in 2023 and carry it into 2024 to claim part of the credit in one year and part in the next year."
The High Efficiency Electric Home Rebate Program, a completely new program, allows rebates of up to $14,000. It's a much larger benefit than the credit, but it applies to similar things, Gayer indicated. The taxpayer has to make less than 150% of the average annual area median income.
"This is a [Department of Housing and Urban Development] standard," he said. "The basic outlines of the program are in the IRA, but the Treasury will write the regulations and distribute funding to the states. The local state departments of energy will be charged with administering the program through local electricians and installers to provide rebates at the point of sale. So before a client makes a decision, they should check the HUD website and decide if their income is less than 150% of the average annual area median income. They may want to defer the project until the state program is up and running, since each state will have its own guidelines."
Small-business owners might want to consider if there's a major energy efficiency plan in their future. "If so, they might want to structure their revenue for 2023 to make it lower in order to qualify for the credit," said Gayer.
"Most of these provisions go into effect in 2023, but they're something that clients should know about at the beginning of the year."
"CPAs should study the IRA and know in big picture terms the things that might impact their clients, and be able to get into details if they're asked," said CNA's Rood. "Send out newsletters with the big picture, and tell your clients to contact you if they have questions. Put the onus on the client to get in touch with you."
And finally, practitioners should consider changing their organizers to ask questions related to the IRA provisions, especially the benefits under the green energy provisions, that may affect their clients.
"The idea is to find out if this is something that you need to talk to the client about," she said. "You can ask it in general terms: 'Have you purchased an electric vehicle or made home improvements during the year?'"
