How Tax Pros Can Maximize Their Own Deductions
Generally speaking, the same tax planning principles apply to tax pros as they do to the client, but here are some key things CPAs and EAs should know when working on their taxes.
There is planning in connection with itemizing or using standard deductions. The 2022 standard deduction is $12,950 for singles, $25,900 in a joint return, and $19,400 for heads of household. ((Rev. Proc. 2021-45.)) “Bunching” itemized deductions in alternate years can help maximize deductions over the long-term.
The most common problem with itemizing is the $10,000 limit on deducting income tax, which is still with us barring legislative change. The $300 ($600 in a joint return) charitable deduction without itemizing went away with 2021.
Medical above a percentage of adjusted gross income is deductible; the familiar 10 percent rule went away with 7.5 percent of AGI now a permanent change for medical deductions. The personal exemption remains at zero in 2022. This deduction is scheduled to return after 2025.
There is the concept of maximizing deductions but understanding the incremental tax savings arising from added deductions (or lost when refraining from a deduction). For example, shifting earned income to a C corporation incurs the 21 percent corporate tax but avoids an immediate tax at the highest marginal rates in the federal and state individual return.
There are, of course, other considerations, including the potential for “double taxation” with a C corporation and its dividends. The individual rates vary with filing status but the first two brackets are less than the corporate rate. The next two brackets are modestly in excess of the corporate rate, while the top three brackets significantly exceed the corporate rate. Also keep in mind that President Biden’s proposals would increase the corporate tax rate.
Business Deductions
If your work as a CPA or EA is as an employee, your normal business deductions are currently disallowed. There are a few exceptions, such as impairment related work expenses (See instructions to Form 2106 (2021)).
Whether a worker is an employee or contractor is an issue in itself. The IRS has a form that can be filed for the purpose of having the IRS rule on whether a worker is an employee (Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding).
Of course, the well-known downside to being self-employed is incurring both halves of payroll taxes, normally split between employer and the employee. The tax professional needs to consider his/her own home-office deduction when available (See “Home Office Deduction at a Glance,” IRS.gov, Form 8829 and Publication 587 (2021) “Business Use of Your Home,” for use in preparing 2021 returns).
The accountant’s business equipment will generally qualify for deduction in the year of acquisition. Typically this is desirable unless the current year is a low tax-bracket year. Computers and laptops, desks, software usually qualify.
Detailed expense planning can help the CPA/EA qualify for the 20 percent of business income tax deduction. For accountants, there may be full, partial or no qualification depending on income levels. The 2022 income thresholds here begin at $170,050 for singles and $340,100 for joint filers (Rev. Proc. 2021-45).
Health Deductions
The professional’s health care premiums may also qualify without itemizing (See “Can You Claim Health Insurance Premiums on Your Taxes?,” Taulli, goodrx.com, 12/13/21).
Annual health savings account (HSA) contribution limits are generally, in 2022, $3,650 (individuals) plus $1,000 if age 55 or older. This limit can be $7,300 for a family health plan. It is possible for the contribution to the HSA to be deductible in arriving at adjusted gross income. These focus on high-deductibles and don’t fit all circumstances but can be a consideration.
A “high-deductible” is defined as $1,400 in 2022 for self-only coverage and $2,800 for family coverage. Such accounts could be vehicles to help accumulate funds to pay medical after retirement (See Sec. 223; “Health savings account (HSA’) FAQs; Fidelity.com).
Retirement Plans
The basic idea includes funding such plans during high-bracket, high-earning years with funds accumulating tax-free to be ultimately distributed in lower-bracket retirement years. This includes, e.g., the IRA, the ROTH IRA, Solo 401k, and Simplified Employee Pension Plans (SEPs) (“Retirement Plans for Self-Employed People,” IRS.gov; “Simplified Employee Pension Plan, SEP,” IRS.gov).
Education
Our topic could reach the following:
- the lifetime learning credit
- American opportunity credit
- student loan interest deduction
- 529 college savings plans
- Coverdell education savings accounts
There is also the “ordinary and necessary” business deduction for carrying on a trade or business. This is the provision that makes our professional continuing education deductible. Its “carrying on” language generally precludes the usual college years of education because preparation doesn’t rise to “carrying on” the trade or business (“Topic No. 513 Work-Related Education Expenses,” IRS.gov).
College training is generally nondeductible, but even gaining a degree is not necessarily going to make the expenses personal rather than business in nature (See Regs. 1.162-5(b)(2) and (3)). Taxpayers who were involved in finance, management and related were entitled to some MBA expense deduction given the focus on maintaining skills of an existing job (Allemeier v. Commissioner, TC Memo 2005-207; “In Taxpayer’s Situation, Cost of an MBA Program Found to Be a Deductible Business Expense,” Zollars, Current Federal Tax Developments, Kaplan Financial Education, 7/26/21).
The “Other” Taxes
Also keep in mind planning for the self-employment tax. The professional with income above the self-employment maximum in one year may benefit from shifting deductions to another year. This may be a consideration generally but more likely an important component of your planning checklist when approaching retirement.
Estate, gift and generation-skipping taxes may be important considerations for many professionals. The relatively high transfer tax exemptions ($12,060,000 as price-indexed in 2022, $24,120,000 for a couple) are scheduled to revert to old, lesser levels post-2025. The annual gift tax exclusion is $16,000 in 2022, or $32,000 for marital split gifts.
The word “transfer” should also connote property tax issues to the tax professional. Long-term planning can sometimes avoid major increases in property taxes, albeit such taxes uniquely turn on local law. Property tax savings can arise from the sequence (and timing) of realty transfers.
Planning Often & Long-Term
As CPAs and EAs, we should be able to say we plan regularly for our own affairs, at least quarterly. We should add to our planning an emphasis of the relatively distant future – three to five years and longer. Also consider now the prospects, possibilities and tax aspects of the eventual sale (transfer) of the professional practice.
As we read up on the myriad tax changes and legislative possibilities, also keep in mind how they affect our own lives and families. Thinking through our own tax issues as we read about tax planning wouldn’t appear to make our tax subscriptions any less deductible.