If you set expectations now for your clients, you will be able to mute their shock when their 2022 tax bill comes due. Your tax-curious prospects are also probably keen to hear how they can save on their taxes. But there’s a fly in the ointment: Washington. Will Congress change any tax laws before 2022 ends?

“The remaining tax legislative push for 2022 primarily relates to the 2023 budget bills,” says veteran Washington observer Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting, in Riverwoods, Ill. “After the November elections there will be a focus on enacting those bills by December 16,” when federal government funding ends. The outcome of the November 8 elections may shape what’s in, or out of, eleventh-hour legislation, he says.

A variety of popular provisions expired at the end of 2021, and some of them won’t be revived, Luscombe believes. That means parts of the American Rescue Plan Act of 2021, including those that expanded the child tax credit and credit for dependent care and childcare, are already gone, and the question is whether they will be resurrected.

Another expired break is an above-the-line charitable deduction for people who don’t itemize. Luscombe, however, thinks this one stands a better chance of being revived than another expired break that allows charitable itemized deductions of up to 100% of adjusted gross income for cash contributions. Beneficent itemizers should likely count on a return to a 60% limit for their cash gifts, for now anyway.

On the bright side for high earners, Luscombe sees little immediate desire among legislators to prohibit backdoor Roth conversions, a technique (albeit taxable) for moving money from a traditional retirement account to a tax-free Roth when the client earns too much to contribute to the Roth directly. Clients who can benefit should get moving on their backdoor Roth conversions before Washington’s mood shifts.

Clients must be reminded, however, that under current law, Roth conversions can’t be reversed with a recharacterization, says Chad Smith, a managing partner of Retirement Planning Specialists, Inc., a planning firm in Ashland, Ore.

RMD Angst
In taxable accounts, investors can sell their currently depressed assets at a loss to offset gains and shield taxes on up to $3,000 of other income. But there’s no way to make lemonade out of sour investments in their tax-advantaged accounts. That’s a quandary for clients who are taking required minimum distributions and “might not be happy about selling assets in a bear market,” Smith says.

One solution to this problem is for RMD clients to quickly build cash in their retirement accounts so there will be less need for them to unload losing positions, says Jeremy Keil, a planner with Keil Financial Partners in New Berlin, Wis. Investors shouldn’t let any cash already in the account sit idle. Money market mutual funds now yield north of 2.0%.

Clients should also consider taking dividends and capital gains distributions in cash, rather than reinvesting into additional shares. December is a big month for fund distributions and corporate dividends. “This could raise cash for the client’s RMD. It might not cover the full amount, but it should help,” Keil says.

Clients who don’t need their required distributions for spending cash could consider an in-kind distribution. This involves transferring securities from a traditional retirement account to a taxable account, ideally at the same institution to keep things relatively simple. “You want to do this with the investments that have dropped the most,” Keil says.

Smith says, “The client will be taxed on the transfer, and the investment’s cost basis in the taxable account is determined by the date of transfer.”

This move can actually help clients come out ahead with their taxes in the long run. In the future, any qualified dividends or long-term gains distributions from the investment would be taxed at capital gains rates. If the investment recovers and is sold more than one year after the in-kind distribution, long-term gains rates would apply. Had the asset remained in the traditional retirement account, ordinary tax rates would have applied to all these forms of income when withdrawn.

Figuring out the exact amount to transfer can be tricky, particularly when it involves mutual fund shares or other assets that price at the end of the day. To make sure the required minimum is met, an investor can either distribute a little more than is likely to be necessary, Keil says, or make it a “two-step transaction in which tomorrow you may have to make up a shortfall with a cash distribution.”

An in-kind distribution can take time to process. Keil says advisors should prompt clients to start these transactions sooner, not later, if they’re appropriate.

Help Business Owners
A tax advantage disappearing in 2023 is business owners’ ability to write off 100% of qualified asset purchases via bonus depreciation. The write-off will drop to 80% on January 1. “We are advising business owners to evaluate their cash flow and consider expediting purchases of large assets so they can be placed in service by year-end and qualify for 100% bonus depreciation,” says Nicole DeRosa, senior tax manager at Wiss & Company LLP, an accounting firm in Florham Park, N.J. The equipment, machinery or other qualified property can be new or used.

DeRosa is gently reminding clients with significant research and development activity that domestic R&D costs must now be amortized over five years. The ability to deduct them in the year incurred expired at the end of 2021. However, that provision has a bona fide shot at being resurrected by Congress, according to Luscombe at Wolters Kluwer. “There’s been a lot of lobbying for it,” he says.

Although it isn’t specifically tied to the year’s end, business owners’ biggest tax-saving opportunity—and a potential black pit—might be to claim the lucrative employee retention tax credit for 2020 or 2021 if they have yet to do so. Payroll tax returns can still be amended for those years. “But even if you amend today, because of significant processing delays at the IRS you’re probably looking at eight months to get the refund,” DeRosa says.

Clients need ultra-competent advice when claiming this bounteous credit because, well, it’s complicated. “There is significant interplay between balancing forgiveness of Paycheck Protection Program loans and maximizing the employee retention credit. We have run into several business owners who unfortunately did not consult a tax advisor prior to submitting for PPP loan forgiveness. They handled it themselves and limited their benefits,” DeRosa says.

Other clients are disregarding their tax advisor when told their business doesn’t qualify for the credit. They then turn to so-called “employee retention credit retrieval firms,” says Colorado tax attorney Bradley Burnett. “These mills pester businesses with repeated emails and sales calls. Sports talk radio features their commercials. Multilevel marketing schemes to peddle the credit have even emerged,” Burnett warns.

These outfits often charge a hefty percentage of the credit they nab for the client, incentivizing them to take aggressive positions that may not hold up under audit. The IRS started auditing returns with this credit in September, according to Burnett, “asking hard-driving questions as to how the business qualifies for the credit and for backup documentation to prove it.”

Advisors should instead steer clients to reputable, established practitioners. The conventional wisdom is that law firms and CPA firms are a cut above.

Urging clients to get help—the right help—may be the best way to assist them as 2022 draws to a close, says Brenda K. Lowe, a CPA in White Bear Lake, Minn. “Frequently, the biggest mistake clients make is not spending the time and money to have their accountant run various scenarios to find the most prudent tax plan,” she says.