Tax Planning - What's New for 2022
The excess business loss limitation provision enacted under the Tax Cuts and Jobs Act (TCJA) was extended through the 2026 tax year in the American Rescue Plan Act .
In response to the $10,000 limitation for the state and local tax deduction, a number of states have enacted legislation that potentially bypasses the limitation by way of new income taxes that are imposed directly on passthrough entities and, correspondingly, provide the owners of these passthrough entities with a tax credit or deduction that acts to fully or partially mitigate the additional expense of the passthrough entity tax.
Section 199A generally allows individuals to take a deduction equal to 20 percent of their combined qualified business income, subject to limitations, plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. A taxpayer’s “combined qualified business income” is the net amount of “qualified items” of income, gain, deduction, and loss from all “qualified trades or businesses” (QTBs) carried on by the taxpayer during the tax year.
Hiring family members to work in your business offers several advantages. First, you provide income to them and may also provide benefits. In many cases, you can reduce the overall family tax bill by deducting from your business’s income reasonable wages you pay to your spouse or children. Although family members must include their wages as income, they may receive other fringe benefits at little or no tax cost. For example, if your spouse earns wages from your business, he or she may be entitled to IRA contributions or to coverage under your business’s qualified retirement plan. You also can provide your spouse with family health insurance coverage as an employee. This will increase the business deduction for premium payments while maintaining the same family coverage.
Given today’s higher exemption amount and historically low transfer tax rate compared to the combined federal and state income tax rate, you may want to consider postponing the transfer of high-value, low-basis assets (especially when they are not appreciating rapidly) until your death. That way, your heir would be able to sell the asset and incur a lower capital gains tax due to the resulting step-up in basis at your death.