H&S Perspectives: Recession Tax Planning for Disappearing Tax Deductions
- November 10, 2022
- Posted by: Hood & Strong
- Category: H&S Perspectives, Tax
Hood & Strong Tax and Advisory Partner George Paulsen offers suggestions for individuals and businesses to prepare for a recession in 2023.
With the big drop in the stock market at the beginning of 2022 and the rise in interest rates and inflation, you may wonder if we are in a recession. The U.S. government marks a recession with a specific formula, and while today we are not “officially” in one, from what I understand we will likely be feeling the effects by early next year. A trusted economist I talked with said it wasn’t likely to be a deep downturn, but it makes sense to evaluate what can we do now to weather the coming storm.
As we get closer to year-end, one strategy to consider is what brokers refer to as “Loss Harvesting.” If you sold property at a gain this year, or after a decline in value, you can rebalance the investments in your taxable portfolio by selling the losers, which helps offset the gains you choose to take.
Another consideration: if your taxable income is down significantly for 2022 and your employer provides the option, think about converting some or all of your IRA or 401k into a Roth IRA or Roth 401k. This way you can report the income at lower rates than you would normally pay. By moving these funds, they will never be taxed as income to you or your heirs, and you will never have to take mandatory withdrawals from a Roth. In the last few years, Congress has proposed to eliminate this conversion option, and while the proposal has been removed from the final bills, it remains on the government’s radar.
For business clients, an important deduction is expiring and being phased out at the end of this year. Bonus depreciation will be limited in 2023, so now is the time to buy machinery, equipment or other business use property to ensure you get the 100% write off. And, if your business could use a plane, boat or car, you can take the deduction if the property is used more than 50% of the time for business. It may be hard to find what you want as production and supply chains have been spotty, but if your business needs to make a major purchase, try to close now and put the asset into service this year.
As always, there are some pitfalls to be aware of to optimize year-end results, and surging interest rates that make refinancing costly can affect other tax planning options as well. So heed the old adage “there are no problems, just opportunities” and reach out to your Hood & Strong tax advisor to help navigate these upcoming economic seas.