The end of 2022 is a short time away and that means we will be in another “tax frenzy” leading up to the April 15th deadline.  KMON talked to David Deffinbaugh, CPA and LPL Financial Representative to learn more about what we should do before the end of the year. The audio version can be heard at the bottom of this story:

Randy: What are some of the things that folks in agriculture need to start thinking about that they can do between now and the end of the year to help reduce some of the tax liability for 2022?

David: Well, whether it's agriculture or regular business here in town, one of the things that people always start thinking about as we get into the close to the end of the year is what do I need to buy in order to have a write off? And I think that's the tail wagging the dog. I think what people really need to look at is, yes, I may need a piece of equipment, but how much do I need it? And I guess the best example I can come up with right now on that, a real world example, is my son. He has a business out in Washington and he just contacted me because there's a piece of equipment that somebody is trying to sell him costs $100,000. And of course they've got financing and everything all arranged and everything. One of the big things that just came up was that the sales people were telling him, you can depreciate this. So he wanted to ask me some more questions on that. And I said, well, yeah, you can depreciate it, but you can depreciate anything that's a business asset. The question is how fast can you depreciate it? Do you want to do it over one year? Does it have to be over one year? Should it be stretched out over a few more years? So depreciation is more question of not if you are going to be able to depreciate it but just a question of how fast. So I think the big question there is what is the purpose of the equipment? In his case, it's a medical equipment. They expect that they will have maybe four or five people a year that will use it. The cost to use it, their fee structure will be like $5,000 for a series of whatever it is that they're having to use this thing with. So then the question is how many people will use that in a year? If there's five, well, that's going to recover $25,000 worth of cost right there. The payback would be over a four year period, might be worth it. If you're only going to have maybe one or two people use it per year, then it's going to take a lot longer for them to recover the cash payback on it. Depreciation, they'll already have recovered that. But what's the point in paying for something even though you can take depreciation on it if you don't get a cash payback out of it? That's what I try to talk to people about to explain why something, even though they can get the depreciation on it, it may not be the best decision for them.

Randy: So business might be smart to lease something versus purchase it if the lease is affordable enough where the payback would cover it.

David: There is some potential there on the leases, but the rules on some of that stuff also. I think you're going more, I think, for like the equipment rent type stuff. And there are some special rules. There is whether you can show it as equipment rent, or you have to capitalize that lease, which is basically the same thing as buying it and depreciating it.

Randy: We’re also getting towards the end of the year and people start thinking about retirement accounts, should businesses start at 401K? Should they contribute? Should they have an IRA? Obviously whether it's a 401K or an IRA may depend upon how many people they have or what their situation is. What would you recommend as far as them to research and look at?

David: The biggest thing on having a retirement plan? I think for a business and even the agricultural stuff, they may have some special things that they can look at that they can take advantage of because they may not have a number of employees like a business in town would. It may be more family employees. So there are definitely some retirement plans that could be utilized in the agriculture side that would be able to produce some big benefits for family members.

Randy: Do those plans have to be in place by December 31 in order to count towards this year's taxes?

David: Some do, some don't. So it's probably beyond the scope of what we're trying to talk about here in this short time period to go into which ones do and which ones don't.

Randy: Now, if a plan is already in place, when is your last time to be able to contribute to a plan that's already in place?

David: Unfortunately, these things are all specific to whatever plan you've got. So again, it's kind of beyond the scope for us to be able to do too much discussion on that because it's going to be specific to whatever they're doing.

Randy: Spring is still a ways away as we see snow falling outside right now, fertilizer, seed, those types of things, are you better off pre purchasing and paying for it this year on this year's tax or what would you kind of gauge that decision on?

David: I think that decision is probably made on a year by year basis because it's going to depend on what kind of income as a cash basis that you are going to have for 2022. How can you offset some of that income? I mean, you know you're going to have that expense anyway. So is it better to prepay it, actually put out the cash and spend it now, or is it better to wait until closer to the date when you're actually going to need it? Everybody's situation is going to be different there, but that is the criteria I would be trying to use as far as determining whether to do it now or later.

Randy: Six weeks left until the end of the year. When should a person be doing all these things, or is this a running thing you're doing all year long?

David: Pretty much, I would say any of this stuff should be being looked at ongoing throughout the year. Particularly, I think a lot of your agriculture people probably either have sold their harvest or maybe they're thinking of selling some of the stuff that they have in the grain bins by year end. So this is a perfect time to be looking at some of that there.

Randy: We keep hearing about changes that are coming both at the federal level and possibly the state level. What are some of the things that we need to be aware of here in Montana?

David: Well, the biggest thing, I think on the federal level, there's a couple of things. One is the energy efficient credit for homes, like if you're replacing a furnace or doing some things like that that has been improved not for 2022, but for anything after 2022. So it makes it an annual limit rather than a lifetime limit. It's been a lifetime limit and it's only been $500. So kind of like you can use that up pretty fast. But now it's going to be an annual limit. And I believe when I was at my Continuing ED course on this a few weeks ago, I believe that annual limit is going to be one $1200 credit. So a $1200 credit is very nice indeed for offsetting some of the tax liability and especially since it can be used each year. So there's some tax planning stuff there for maybe you do something that's going to qualify one year. Maybe you do half the windows one year to make sure you get your $1200 for that year, do the other half the next year.

Randy: And that's a tax credit. So that's a dollar for dollar? Give an example of credit. I owe $10,000 to the government in taxes, okay?

David: Using this energy efficient thing, if you qualify for the whole credit, the $10,000 minus the $1200 means $8800 that you're going to owe. So it saves you that dollar for dollar. If it was a deduction, you would take whatever that taxable income was that made it $10,000 and you deduct it from there so that your taxes might be instead of $10,000, maybe they're $9,500. So it's much, much better to have a credit than it is to have a deduction. The other big thing that's going to be coming through, you probably heard of virtual currency, bitcoin and all these other sort of things that are going the IRS is watching this closely because there's a lot of stuff that's not getting reported that way. And over the next few years, we're going to see some things that are going to start happening. And I believe even in 2023, people that have regular brokerage accounts holding normal stocks and that sort of thing, they get a brokerage statement at the end of the year showing their buys and sells and that sort of stuff. In 2023, the people that are doing the virtual currency are going to have to send out similar type reports. And so those reports, they go to the client who has the account and they also go to the IRS. So virtual currency people, it is coming to where you're going to have to do some more reporting.

Randy: I've heard rumblings that they're talking about changing the tax brackets because of the inflation, because of those types of things. Is that something that has come down to you guys?

David: That's already happened because the brackets are already decided now for the 2022 and 2023. So that's already been taken into account. And we've seen some headlines that are showing that the brackets going from the 10% to the 15% and on up to whatever percentage they are, they've already been adjusted. I don't remember if they've actually been released out to the public yet, but at least the news is starting to come out that they're going to be much different.

Randy: And that will be beneficial to help offset some of the extra expenses we've had?

David: Yes, I wouldn't say expenses because there's not much that we can do for itemizing deductions anymore. But basically, whatever the taxable income is, if the brackets are higher, then you're going to stay at the lower tax rate.

Randy: Mileage, as far as our federal rate now, that changed this year, correct?

David: The mileage rate did change. This is one of the years where they made a change in the middle of the year. And so they bumped it up to, don't remember whether it was as of July 1, but sometime here in the middle of the year. And they may or may not. I don't know that I've seen anything about getting it changed as of the 1 January. Typically it changes once a year unless we've had some big things as far as the way gas prices have spiked, which is why it changed this year.

Randy: Anything else that you can think of?

David: The biggest thing that I think that people want to be aware of is, and they may not have remembered this from when the legislature met, they're back in 21, but Montana is changing its tax form. This is a major change from what they've done for many years. And so that's going to be phased in for 2022 and 23 and 24 will be when it's fully in place, and it's going to lower tax rates for 2022. And essentially what is going to happen is they're going to take the income that's on the federal return and start with that as the form is right now. You can show that, but then you do a bunch of adjustments for what Montana rules are. This is going to take it to where a lot of the other states are. We're going to start with the federal income. There which already has the high standard deduction in there. So we're going to start with that. Then there's going to be two tax rates, 4.5% and 6%. So whatever the few adjustments are that they're going to allow you to do from the federal taxable income there, wherever you end up, you'll either be at 4.5% to pay or you'll be at 6%. Now remember, this stuff is going to be phased in through 2024. So some of these things, we still have multiple tax brackets in 2022, but it is going to be a lower tax rate. The other big thing is the elderly homeowner credit that is increasing for 2022.

Randy: Elderly being what, age and up?

David: Elderly homeowner credit can start from age 62, homeowner renter credit, and so it starts from age 62. There's some things you have to look at as far as what is total income. There's some other calculations that go into that, but it can be a very nice credit for people. It's kind of like property tax relief for the people that are homeowners. And then since people that are renting are essentially paying property taxes through their rent, it still has that same effect for them. And so it will be going up from $1,000 to $1,150. So that can be a significant thing for people. But along with these changes, there are a lot of credits that are no longer available.


Dave recommends talking to a professional about your individual tax and investment needs. It is more efficient and may save you problems down the road. To learn more about Dave and his business. Click HERE

Here is the audio version of the interview:

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