It’s January so it’s that time of the year when we must pay attention to the ever-present issue. No, it was not rooting for (or having to watch) Alabama in another national championship (Mel was not really happy with that outcome). It’s finding out what the new tax numbers are for 2022.
From tax rates to deductions and credits, all of these new figures can impact your tax planning for 2022. They can mean opportunity for some and danger for others so knowing them is one thing – understanding how to implement strategies to take advantage of them is another. For now, we will merely provide the new numbers as released in November, 2021. With inflation relatively high last year, most of the numbers certainly did increase by a decent amount. For the tax students out there, you can verify this information and find more details at Rev. Proc. 2021-45.
1. Tax BracketS
The tax rates have not changed but the thresholds at which such rates apply have changed. Note that the brackets are legislated to change in 2026 (which is generally more onerous than the current brackets).
2. Capital Gains Rates
If you are in the 0% tax bracket, there may be a great opportunity to reduce taxes. If not and if you have significant capital gains, consider tax minimizing strategies but don’t let the tax tail wag the dog. (This is almost as important of a rule as “don’t get caught watching the paint dry” as proclaimed in the move, “Hoosiers.”) The threshold that corresponds to the tax rate is noted as follows:
3. Standard Deduction
The standard deduction increased from $12,550 to $12,950 (Single filers) and from $25,100 to $25,900 (Joint filers) for 2022. The additional standard deduction for those over 65, blind, or Cleveland Browns fans (I kid!) have increased to $1,750 (single) and $1,400 (each for joint filers). (Currently, the standard deduction is legislated to decrease to its previous lower amount in 2026.)
4. Retirement Plans
The employee elective deferral increased to $20,500 (from $19,500). The catch-up contribution of $6,500 remains unchanged. Thus, the total contributions for those 50+ are $27,000. As you know, those same limits apply to Traditional contributions and Roth contributions to company retirement plans.
SIMPLE IRAs increased slightly to $14,000. The catch-up remains at $3,000.
SEP IRAs max contribution increased to $61,000, but it is still generally limited to the 25% of eligible compensation. (Watch this calculation – it’s not as easy as you think.)
No change here – it is still $6,000 as the standard contribution and $1,000 for the catch-up. The same amount applies to Traditional as well as Roth IRAs, but the eligibility rules obviously differ. The eligibility income thresholds did change, and they are as follows:
Stay tuned on the applicability or eradication of the infamous Backdoor Roth IRA strategy!
6. Health Savings Account
For those of you that know me, this is my favorite strategy in the right situation. The max contributions increased to $3,650 (single) and $7,300 (joint) with a catch-up remaining at $1,000. Note that the catch-up age for Health Savings Accounts is age 55 (versus age 50 for IRAs). No inflation here!
7. The Child Tax Credit
This remains at $2,000 (which is actually a decrease due to favorable tax legislation in 2020 and 2021) with the thresholds remaining at $200,000 (single) and $400,000 (joint). This is a huge benefit. If you are close to qualifying, do what you can to qualify. A credit is a dollar-for-dollar benefit! It’s not too late to try to have another child in 2022! (Consult your physician, however, before engaging in strenuous activity.)
8. Business Mileage Deduction
This increased to 58.5 cents per mile. I don’t think that was enough, but I’ll take it. Keep good records!
9. Qualified Business Income Deduction
This is important for the small business owner. Note that thresholds increased that impact whether you can obtain the thresholds in the first place and how to calculate this potentially beneficial deduction. For single filers, that amount starts at $170,050 and at $340,100 for joint filers.
10. Annual Exclusion
OK, this does not apply to many of you, but I’m including it here because it finally increased. It is now $16,000 per donor per donee. It’s up from $15,000.
11. Transfer Tax Exemption
OK, this applies to even less of you, but I wanted to include it a as a cautionary tale. It increased to $12,060,000. That means a married couple may generally leave over $24,000,000 to heirs without having to pay federal estate taxes. That’s something to shoot for if you are not quite there yet.
The cautionary tale is that this is legislated to decrease in 2026 to its formerly low low amount of just a bit over $5,000,000 (inflation-adjusted). Be on the lookout to see where these laws go. Even if you are well below those thresholds, you need to revisit your wills and trusts to confirm your dispositive provisions are not impacted by the change in these laws. For some of you that have not revisited your estate planning in a while, this will bite you!
There are many other thresholds and deductions that were also increased, but time is short.
13. There are many tax numbers that do not increase with inflation which basically means there is a silent tax increase on everyone where these taxes apply. That includes the following:
- Net investment income tax on certain incomes of $200,000 (single) and $250,000 (joint).
- Social Security Thresholds. More and more people will be subject to higher and higher income taxes on their Social Security checks. Boo!
- Short-term losses remain at $3,000. This dates back nearly to the Indiana Pacers’ last ABA championship.
- State and local tax rate cap on Schedule A Itemized Deductions remains at $10,000. Be aware of potential legislation in 2022 – this may impact planning for lots of taxpayers. Note that this cap is legislated to go away in 2026.
Until next year and unless Coach Saban retires, we will revisit whether Alabama can redeem themselves and hoist another trophy and what the new tax numbers are for 2023. In the meantime, feel free to reach out to Oasis Wealth to help you take advantage of some of these changes in the tax laws.