Remember the excitement of the last day of the school year? Many adults have fond childhood memories of being off from school for the summer. But summer break isn't just for kids. Here are nine potential summertime tax breaks for grown-ups — including many that allow small business owners and individuals to combine tax savings with summertime fun.
1. Dine on the Company's Dime
Generally, under long-standing tax rules, you can deduct only 50% of the cost of qualified business meals. But the Consolidated Appropriations Act (CAA) carves out a special temporary exception. It allows a 100% deduction for food and beverages provided by a restaurant in 2021 and 2022. This includes both eat-in and take-out fare.
Take advantage of this unique tax break this summer. Keep in mind that the cost of tickets to attend a ballgame with clients is no longer deductible as business entertainment, but you can write off 100% of the cost of food and beverages consumed there if they're invoiced separately.
2. Map Out Business Trips
Travel is heating up after slumping during the pandemic. Are you planning any trips this summer? If the primary purpose of a trip is business-related, you can write off your travel expenses, even if you do some vacationing while you're away.
For instance, if you fly cross-country and spend the workweek in meetings and the weekend sightseeing, the entire cost of your airfare, plus business-related meals, lodging and local transportation, is deductible within the usual tax law limits. But you can't write off any personal expenses.
Furthermore, if your family accompanies you on the business trip, their expenses aren't deductible. But you can write off what it would have cost you to travel alone. For instance, if you pay $250 per night for a hotel room and a single room costs $200, you can deduct $200 per night.
3. Send the Kids to Day Camp
Parents who work full-time often send young children to summer camp while school is out. Assuming certain requirements are met, the cost qualifies for a dependent care credit. For 2022, the maximum credit for moderate-to-high income taxpayers is $600 for one child or $1,200 for two or more kids.
This tax break is only available for day camps, including specialty camps for athletics or the arts. An overnight camp doesn't qualify.
Important: COVID-19 relief legislation enhanced the dependent care credit, but those changes expired after 2021. There's a chance that the enhancements could be retroactively extended by Congress.
4. Sweep Up Charitable Deductions
If you spend some downtime this summer cleaning out the garage, attic or basement, you'll likely find some household goods — such as used clothing or furniture — that you don't need or want anymore. Instead of discarding these items, consider donating them to charity. Assuming they're still in good condition, you'll be eligible for a charitable deduction based on their current fair market value.
However, charitable deductions are only available to people who itemize. If you expect to claim the standard deduction in 2022 (rather than itemizing), you'll help out the charity — but you won't get any personal tax breaks.
5. Go Green
The 10% tax credit for installing energy-saving home improvements — such as installing an ENERGY STAR certified water heating or central air conditioning system — technically expired after 2021. (Although it's possible that Congress could revive the credit again.)
However, you may still benefit from an alternative credit for renewable energy resources. The list of qualified expenses includes:
- Solar panels and solar-powered water heaters,
- Wind turbines,
- Geothermal heat pumps, and
- Fuel cells relying on a renewable resource (for example, hydrogen).
This credit, which is gradually being phased out under current law, is equal to 26% of qualified expenses incurred in 2022. It's scheduled to drop to 22% for 2023 and then expire in 2024.
6. Jump Aboard an RV or Boat
The outdoor craze spurred by the COVID-19 pandemic has brought recreational vehicle (RV) and boat sales to record levels. If you're currently shopping for an RV or boat for personal use, be aware that people who itemize can deduct annual state sales taxes paid during the year in lieu of their state and local income taxes.
Important: If you choose to deduct sales taxes based on the optional IRS table, instead of keeping track of all your actual expenses, you may write off the sales tax for certain high-cost items — including RVs, boats and vehicles — in addition to the table amount.
As a bonus, an RV or boat can qualify as a personal residence if it has sleeping, cooking and toilet facilities. In this case, you may also be able to deduct mortgage interest on the property, within the usual limits.
7. Track Vacation Home Use
Your vacation home is classified as a personal residence if:
- You rent it out for less than 14 days during the year, and
- Personal use during the year exceeds the greater of 1) 14 days, or 2) 10% of the days you rent the home out at fair market rates.
Personal use generally means use by an owner, certain family members of an owner and any other party (family member or otherwise) who pays less than fair market rental rates. When calculating personal use, disregard days of vacancy and days spent mainly on repair and maintenance activities. So, if you spend a couple days tidying up the place, it won't count against you, even if the rest of the family is enjoying the great outdoors at the same time
The tax law allows you to deduct vacation home rental expenses to offset rental income you receive. With summer fast approaching, you may have worked out a rental schedule, but know that that you can't deduct a loss if your personal use of the home exceeds the greater of 14 days or 10% of the time the home is rented out. To avoid this pitfall, make sure that your personal use remains below these limits.
8. Rent Out Your Personal Residence
Do you live in an area where an event — such as a golf tournament or music festival — is held? If so, consider moving out while the event is happening and renting your home to attendees. If you rent out your home for no more than two weeks, you don't have to comply with the usual tax rules.
That means you aren't taxed on the rental income; it's completely exempt from federal income tax. But you also can't deduct rental-based expenses either. You might use the extra income to splurge on your own vacation while the event takes place — or you can spend it on upgrades or repairs to your home that you've been postponing.
9. Harvest Capital Gains or Losses
Midyear is a good time to review your investment portfolio. If you've already incurred capital losses from securities transactions, any gains you realize between now and the end of the year may be absorbed by those losses.
Conversely, if you realized capital gains earlier in the year, the losses you "harvest" during the summer can offset those gains, plus up to $3,000 of ordinary income in 2022. Any excess loss is carried over indefinitely.
If you'll show a net long-term gain for 2022, the maximum tax rate for most taxpayers is 15% (20% for certain high-income taxpayers). Plus, if you're an upper-income investor, you may be liable for a 3.8% net investment income tax (NIIT) on top of your regular capital gains tax. However, those in the lowest tax brackets — like your children — may benefit from a 0% tax rate on long-term capital gain.
For More Ideas
These are just a few possibilities to consider. Your HK tax advisor may have many other suggestions. With the proper planning, you can bask in the sun and tax-saving opportunities all summer long.