You may be reviewing the past year with your clients as they get ready to file their 2021 income taxes, but your clients also are looking ahead to tax changes that may affect their plans. You may have begun amending your clients’ plans for 2022 to account for changes such as higher tax brackets and a more significant standard deduction, among other things.
Let’s take a look at some tax changes your clients will need help in preparing for in the coming year.
Tax Brackets And Tax Rates
Due to inflation, income limitations in all tax bands will be changed in 2022 for taxes submitted in 2023.
There will be seven federal income tax brackets starting next year, ranging from 10% to 37%. Anyone with taxable income beyond $539,900 for single filers and $647,850 for married joint filers are subject to the top tax rate of 37%.
Let’s check them.
For individual single taxpayers:
• 10%: Taxable income up to $10,275 (up from $9,950 for 2021).
• 12%: Taxable income between $10,275 and $41,775 (up from $9,950 to $40,525 for 2021).
• 22%: Taxable income between $41,775 and $89,075 (up from $40,525 to $86,375 for 2021).
• 24%: Taxable income between $89,075 and $170,050 (up from $86,375 to $164,925 for 2021).
• 32%: Taxable income between $170,050 and $215,950 (up from $164,925 to $209,425 for 2021).
• 35%: Taxable income between $215,950 and $539,900 (up from $209,425 to $523,600 for 2021).
• 37%: Taxable income over $539,900 (up from $523,600 for 2021).
For married individuals filing jointly:
• 10%: Taxable income up to $20,550 (up from $19,900 for 2021).
• 12%: Taxable income between $20,550 and $83,550 (up from $19,900 to $81,050 for 2021).
• 22%: Taxable income between $83,550 and $178,150 (up from $81,050 to $172,750 for 2021).
• 24%: Taxable income between $178,150 and $340,100 (up from $172,750 to $329,850 for 2021).
• 32%: Taxable income between $340,100 and $431,900 (up from $329,850 to $418,850 for 2021).
• 35%: Taxable income between $431,900 and $647,850 (up from $418,850 to $628,300 for 2021).
• 37%: Taxable income over $647,850 (up from $628,300 for 2021).
These higher levels are intended to provide relief to Americans who find themselves paying more when the cost of living rises due to inflation. Although this may appear to be Congress and the IRS sympathizing with taxpayers, it is actually part of an automatic inflation-adjusted tax bracket modification.
On top of the change, taxpayers’ standard deductions will increase next year, and that increase may help clients achieve their financial goals. The standard deduction for individual taxpayers and married taxpayers filing separately will increase to $12,950 in 2022. For married taxpayers filing jointly, it is $25,900 and $19,400 for heads of household. The standard deduction will be $1,350 higher for individuals over age 65 and $1,650 higher for unmarried individuals who do not have a surviving spouse in 2021.
For the 2022 tax year, individuals over 65 would pay $1,400 more, and those unmarried and without a surviving spouse will pay $1,750 more. The high inflation rate that everyone witnessed last year affected budgets and constrained cash flow, but the tax adjustments that will take effect in 2022 could aid a lot of middle-class people.
Michael Fischer, director and wealth advisor at Round Table Wealth Management in Westfield, N.J., said, “We’d also expect corporate rates to increase slightly from the current 21% to possibly 26.5% or 28%, which have both been suggested.” He also expects a tax reform bill will be passed at some point in 2022.
Capital Gains Tax
Earnings from selling an asset are subject to capital gains taxes. Short-term gains are taxed as ordinary income, whereas long-term gains are taxed at 0%, 15% or 20%, depending on the taxpayer’s filing status and taxable income. The IRS has raised the long-term gain income limits for the 2022 tax year.
The tax rate will be 15% for:
• Single filers: income range $41,676 to $459,750.
• Married filing jointly: income range $83,351 to $517,200.
• Married filing separately: income range $41,676 to $258,600.
• Head of household: income range $55,801 to $488,500.
No tax rate will be charged to the income level below $41,676, and a 20% tax rate will be imposed on all these incomes above this income range.
Check out the income thresholds that might make investors subject to this additional tax:
• Single or head of household: $200,000.
• Married filing jointly: $250,000.
• Married filing separately: $125,000.
• Qualifying widow or widowers with dependent child: $250,000.
Earned Income Tax Credit
The earned income tax credit is a refundable tax benefit available to low- and moderate-income employees. The sum is determined by the family’s earnings plus the number of children in the family. Individuals without children may also be eligible for EITC. Earned income credits will vary from $560 to $6,935 in 2022, depending on the earnings and number of children.
You may have noticed that in 2022, the amount of tax credit accessible to people without children fell dramatically. That’s because the American Rescue Plan Act increased the amount from $543 to $1,502 in 2021; however, this increase did not carry over to the 2022 tax year.
The IRS will allow retirees to contribute an extra $1,000 annually to a qualified account such as a 401(k), 403(b) or 457 beginning in 2022. Workers will be able to contribute a total of $20,500 next year. Inflation is expected to grow in 2021; thus, hikes are necessary.
For those ages 50 and up, the catch-up contribution ceiling remains at $6,500. This implies that employees over 50 can defer up to $27,000 in income in their employer-sponsored qualifying plans.
Furthermore, these plans’ total employer and employee premiums have been increased from $58,000 to $61,000, allowing more money to be invested in them.
If your clients have a health savings account, recent revisions will significantly impact your clients who qualify. The maximum yearly HSA contribution for individuals was previously increased to $4,950 in 2022, a $150 increase. The maximum amount of HSA contributions for a family plan has increased by $250 to $7,400. HSA balances can be carried over year after year, and interest can be earned tax-free.
Roth IRA Conversions
Shortly before President Joe Biden was inaugurated last year, he laid out the following goals for his “Build Back Better” agenda. This legislation includes funds for infrastructure, social assistance programs and other projects, such as climate change.
Backdoor Roth individual retirement account conversions (when an account holder converts a regular IRA to a Roth and pays the applicable taxes) would be prohibited under a proposal in Congress, and all Roth conversions would be subject to new requirements.
You may encourage your clients to perform backdoor Roth conversions this year rather than waiting until April 15. Your clients must act before Dec. 31. Early modification may allow them extra time to pay any taxes that aren’t due until the following year’s Tax Day. In other words, if they convert to a Roth in December 2022, they won’t have to pay taxes until April 2023.
The maximum yearly contribution for single, head of household or married filing separately (if your clients didn’t live with spouse during the year) taxpayers with marginal average gross income less than $129,000 in 2022 will be $6,000 ($7,000 if 50 or older). The contribution is reduced and not allowed for those with a MAGI of $129,000 to $144,000 in 2022, and it is reduced and not permitted for MAGI of more than $144,000 in 2022.
The contribution is $6,000 ($7,000 if age 50 or older) for couples filing jointly or qualified widows or widowers with MAGI of less than $204,000. The contribution is lowered and not allowed for those with MAGI of $204,000 to $214,000 in 2022 or more than $214,000 in 2022.
The contribution is reduced or not allowed for married filing separately taxpayers (if the client lived with a spouse at any point during the year), depending on whether their MAGI is less than $10,000 or more than $10,000.
By 2032, Congress is expected to restrict Roth conversions to single filers with annual earnings of less than $400,000 or married filers with annual earnings of less than $450,000. Because many financial advisors serve “mass affluent” clientele, a moratorium on Roth conversions is unlikely to cause significant disruptions for this group.
Gift And Estate Tax
The yearly exclusion limit for gifts to anybody (except donations of future interests to trusts) will rise to $16,000 in 2022, while the annual exclusion limit for gifts to a noncitizen spouse will rise to $164,000.
In 2022, the baseline exclusion level in New York will rise from $5.93 million to $6.11 million.
In 2022, the eligible exclusion amount for Connecticut estate and gift taxes will increase from $7.1 million to $9.1 million. In 2023, this sum is expected to equal the federal estate and gift tax exclusion amount.
I’m referring to a section of the tax legislation that affects high net worth individuals. Under this part of the tax law, the exclusion will be hiked to $12.06 million per person in 2022 from $11.7 million in 2021. A married couple can now defer federal estate and gift taxes on a total of $24.12 million.
The estate tax is imposed at 40% on the largest estates. The wealthy can escape the estate tax by passing wealth to heirs early. They do so by giving large gifts — often in the millions of dollars — that eat up the $12 million exemption limit, as well as by giving a number of $16,000 yearly exclusion donations that don’t count against the limit.
In 2022, a person can give $12.06 million to heirs and avoid paying federal estate or gift taxes.
On the other hand, a married couple can provide $24.12 million to heirs and avoid paying federal estate or gift taxes. For a couple that has previously given away $720,000 in their lifetime, the new, more significant exemption implies they can give away another $720,000 in 2022.
Lisa Featherngill, national director of wealth planning at Comerica Bank’s Dallas office, said the exemption increase means “almost $300,000 of additional assets that a person can give away either during life or at death without incurring a 40% transfer tax. While the estate exemption is increased for inflation in 2022, the current law will sunset in 2025, which means that it’s time to utilize the exemption now, before it is cut in half.”
Considering the deadlines of the various proposed tax law changes as well as their significant implications, you should consult with your clients now. Decide with them how to deal with these proposed tax changes and determine whether any immediate action is necessary.