2022 Tax Changes
2022: Adjusting for Inflation
2021 saw minor changes in tax brackets and contribution limits with small cost of living adjustments from the prior year (2020). 2021 was a different story in terms of inflation (CPI was up ~7%), prodding the IRS to adjust tax brackets and standard deduction levels to higher rate levels.
There are still plenty of discussions happening at the federal level about tax rates and credits, but few proposals have gone through (read our blog: Uncertainty Still Reigns: An Update on the Tax Proposals).
Tax Brackets & Standard Deduction
2022 income thresholds were adjusted for all filing statuses to help account for inflation. Most brackets were moved up slightly above 3% (significantly missing the ~7% CPI mark in 2021), and for the 90% of taxpayers who claim the standard deduction, they were adjusted by a similar percentage from $12,550 and $25,100 to $12,950 and $25,900, for single and MFJ filers, respectively.
| Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | Up to $10,275 | Up to $20,550 | Up to $14,650 |
| 12% | $10,276 to $41,775 | $20,551 to $83,550 | $14,651 to $55,900 |
| 22% | $41,776 to $89,075 | $83,551 to $178,150 | $55,901 to $89,050 |
| 24% | $89,076 to $170,050 | $178,151 to $340,100 | $89,051 to $170,050 |
| 32% | $170,051 to $215,950 | $340,101 to $431,900 | $170,051 to $215,950 |
| 35% | $215,951 to $539,900 | $431,901 to $647,850 | $215,951 to $539,900 |
| 37% | Over $539,900 | Over $647,850 | Over $539,901 |
| Filing Status | Deduction Amount |
|---|---|
| Single | $12,950 |
| Married Filing Jointly | $25,900 |
| Head of Household | $19,400 |
As a reminder, if you choose to itemize instead of taking the standard deduction, be sure to save and keep records of your property taxes, medical expenses, mortgage payments, charitable donations, and more.
Popular Tax Credits
The Child Tax Credit (CTC) has moved back down to $2,000 for a child under the age of 17. This begins to be phased out at Adjusted Gross Incomes (AGIs) of $400,000 and $200,000 for married filing jointly and single filers, respectively. The credit for dependents who are not a qualifying child is $500.
Many Americans received advanced payments for the CTC under the American Rescue Plan (read our blog: The American Rescue Plan). The American Rescue Plan increased the amount and eligibility, in addition to advance payments. If you received advanced payments, you need to file the new IRS letter 6419.
The Child and Dependent Care Tax Credit has reverted to prior levels after receiving a large upgrade in 2021. Maximum expenses for one or multiple children are cut back to $3,000 and $6,000, respectively with the maximum applicable percentage of 35%. This can result in the maximum potential credits reaching $1,050 for one child and $2,100 for two or more.
The America Opportunity Tax Credit can still provide up to $2,500 in tax credit per individual on $4,000 in qualified expenses (e.g. tuition). Modified AGI phase-outs are staying put at $160,000 and $80,000 for married filing jointly and single filers, respectively. Keep in mind, 40% of this credit is refundable.
The Lifetime Learning Credit can provide up to a $2,000 tax credit on qualified education expenses. For those not eligible for the America Opportunity Tax Credit this can be a beneficial alternative. The Modified AGI phase-out for married filing jointly and single filers now begins at the same level as applied to the American Opportunity Tax Credit.
The Federal Adoption Tax Credit can now be worth up to $14,890 ($14,400 in 2021). This amount is not refundable, but unused credits can be carried forward for up to five years.
The Premium Assistance Tax Credit in 2022 can be eligible to those whose income levels fall below the 400% Federal Poverty Level. If you purchase health insurance through the state exchanges, you may be able to receive credits to offset some of those premium expenses.
Recovery Rebate Credit - If you didn’t qualify for the third stimulus payment and your income has since lowered, you may qualify for the stimulus in the form of recovery rebate credit. You also may qualify if you had a new child in 2021.
| Tax Credit | Amount | Details |
|---|---|---|
| Child Tax Credit | $2000 per child under 17 and $500 per non-child dependent | AGI phase-outs at $400,000 (MFJ) and $200,000 (S) |
| American Opportunity Tax Credit | $2500 per individual on up to $4,000 in qualified expenses | AGI phase-outs at $160,000 (MFJ) and $80,000 (S); 40% refundable |
| Lifetime Learning Credit | $2,000 on qualified expenses | Potential alternative for those ineligible for the America Opportunity Tax Credit |
| Federal Adoption Tax Credit | $14,890 | Not refundable but can be carried forward |
IRAs
Traditional and Roth IRAs did not receive a bump in contribution limits for 2022; however, other retirement plans (e.g. 401k and SEP IRAs) received large increases (~5%) heading into the new year. AGI phaseout limits on retirement accounts increased by ~3%.
| Tax Filing | 2021 | 2022 |
|---|---|---|
| Single w/ QP | $66k-$76k | $68k-$78k |
| MFJ both w/ QP | $105k-$125k | $109k-$129k |
| MFJ one w/ QP | $198k-$208k | $204k-$214k |
| Tax Filing | 2021 | 2022 |
|---|---|---|
| Single (S) | $125k-$140k | $129k-$144k |
| Married Filing Jointly (MFJ) | $198k-$208k | $204k-$214k |
Backdoor Roth IRAs are a big question mark heading into this year. There has been serious discussion of its removal, but nothing has been signed into law. We would recommend waiting for more clarity before you make a backdoor Roth Contribution for 2022.
Retirement Plans
SEP IRAs are limited up to 25% of compensation or $61,000, whichever is less. Up from 2021’s dollar limit of $58,000.
Simple IRAs employee contributions are increased from $13,500 to $14,000 in 2022, remaining at $3,000 for the catch-up (age 50+).
401(k) and 403(b) plans increased their contribution limits from $19,500 to $20,500. $6,500 catch-up remains.
Maximum defined benefit plan benefits increase to $245,000 for 2022.
| SEP IRA Limits | 25% of compensation or $61,000 (whichever is less) |
|---|---|
| Simple IRA Limits | $14,000 ($3,000 for catch-up (age 50+)) |
| 401(k) and 403(b) Contribution Limits | $20,500 ($6,500 for catch-up) |
| Maximium Defined Plan Benefits | $245,000 |
Social Security
The maximum compensation subject to Social Security tax continues to grow at a strong pace; now up to $147,000 which is 3% greater than 2021’s $142,800 maximum amount. The cost-of-living adjustment (COLA) for 2022 benefits is 5.9%.
Taxes on Medicare still have no limit.
The maximum monthly benefit at Full Retirement Age (FRA) is $3,345. Keep in mind, this can grow if deferred past FRA up to the age of 70.
| Max Compensation Subject to Social Security Tax | $147,000 |
|---|---|
| Cost of Living Adjustment (COLA) | 5.90% |
| Limit on Medicare Taxes | None |
| Max Monthly Benefit at Full Retirement Age* | $3,345 |
Estate & Gifts
For the 11th year in a row, the estate and lifetime gift exemption will grow (now up to $12,060,000 per person) and the annual gift exclusion received an increase from $15,000 to $16,000. There are expectations that lifetime exemptions will be cut significantly in the coming years. And as of now, we know that the Tax Cuts Jobs Act is scheduled to sunset after 2025. You may want to consider some estate planning depending on your current and anticipated net worth.
| Annual Gift Exclusion | Lifetime Gift Exemption |
|---|---|
| $16,000 | $12.06 million |
Planning for 2022
It’s important to think about your income, giving, saving, and estate planning expectations for the upcoming year so that you can make decisions early to help optimize your tax bill and investable assets.
2022 may be a good year to utilize annual gift exclusions early or to fund your monthly gifts for the year by donating long-term appreciated securities in the first quarter. Determine early whether you should be putting money into a Roth or pre-tax 401(k) and if IRA contributions make sense. If income is expected to be low, maybe 2022 will be a good year for Roth conversions. Or maybe you need to get into the bi-annual routine of “clumping” tax-deductible items to get the maximum benefit. Or, use a Donor Advised Fund to capture increased benefits that come with “multi-year” or extended charitable deductions. There may be more options available to you than you realize!
If you need help putting the puzzle pieces together, please reach out to any of our team members at Kings Path. We would be happy to discuss how you can plan your taxes effectively, in 2022 and beyond.
