Each new year brings a new opportunity to make changes to your financial life.
And each year, consumers have to wade through adjustments in tax law to plan properly. This January is no different.
Here are nine things to know so you can be tax-ready for 2022.
1. You can save more for retirement
In 2022, you can save more to your employer-sponsored retirement plan.
The maximum that you can put away has been upped to $20,500 for the year, but if you’re 50 or older, you can save $27,000, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.
“It is important to set the annual contribution at the 10 to 15% level, in my opinion, to avoid lifestyle creep, which can be insidious over time as it is baked into the cake,” he said. “If 10 to 15% is redirected off the top, it never hits the checking account to be spent.”
At the very least, you should save enough to take advantage of any employer matching funds, experts say.
“If your company has a 50% match, up to say 6% of compensation, you have an automatic return on investment of 50% the day the funds are withheld from your pay,” said Kenneth Bagner, a certified public accountant with Sobel and Co. in Livingston. “Based on this example, it is essentially a 3% increase in compensation. The employer match is not subject to income taxes, either.”
2. What about IRAs?
There are no changes to contribution levels for IRAs in 2022, but there could be changes to a popular IRA strategy.
First, the total contribution you can make this year is $6,000, or $7,000 if you’re 50 or older. Eligibility, and whether your contribution is deductible, will depend on your income level and whether or not you have a retirement plan at work.
The Build Back Better plan, which has not yet made its way out of Congress, may make some changes to so-called backdoor IRA conversions, Maye said.
“A backdoor Roth IRA conversion is when an individual makes a non-tax deductible IRA contribution and then does a Roth conversion in short order,” he said. “In this situation, there is little to no tax liability on the conversion when done correctly.”
The current version of the new legislation also calls for income limits for new contributions and changes to retirement plan distributions.
3. Does the standard deduction change?
Yes.
The standard deduction will increase by $800 for married couples filing jointly, going from $25,100 for 2021 to $25,900 for 2022, Bagner said.
For single filers and married individuals who file separately, the standard deduction will rise by $400, from $12,550 to $12,950.
“If you are over the standard deduction, you can itemize your deductions, but most Americans take the standard deduction,” he said. “To the average person, it is a slight tax benefit annually with an increased deduction.”
4/ What about tax brackets?
Tax brackets increase every year, Bagner said, based on a cost-of-living adjustment.
The 2022 current brackets are 0% to 10%, 12%, 22%, 24%, 32%, 35% and 37%, he said.
“With the rise of cost of living there is an annual adjustment to the tax brackets, which saves the average person a slight amount of taxes as it takes longer to move into the next tax bracket,” Bagner said. “You move into each tax bracket as your income increases and since we have a progressive tax system, the rates increase as you make more money.”
5. Will I get the child tax credit every month again?
We don’t know yet.
For 2021, the child tax credit was expanded and paid monthly during the second half of 2021, as much as $300 per child depending on age and income level.
As part of the Build Back Better plan, the monthly payments would likely continue, but there may be new income eligibility limits — giving the benefit only to those on the lower income scale. The negotiations continue.
As in 2021, it’s expected that you will probably have the option of taking it as a monthly payment or waiting until you file your tax return and taking the full credit then.
Bagner said he recommends people take the money monthly.
“I would say it’s always better to have the funds now instead of having the IRS hold it for you, but you should contain your spending habits and consider investing those funds, if possible,” Bagner said. “Some people prefer (waiting to file their tax return) but it is more financially prudent to have the funds on hand.”
6. Should I change my withholding?
Maybe.
The decision to adjust your withholding should be based on your personal situation so you can take into account any changes in income or deductions.
You should have a conversation with your tax preparer to help you make the correct withholding estimates, or use this handy tool offered by the IRS.
7. Will higher Social Security cost me more in taxes?
For 2022, Social Security recipients will receive a beefy 5.9% cost of living increase.
While New Jersey does not tax Social Security benefits, there is one thing you need to consider.
For some, the raise could trip some unexpected tax increases, Maye said.
“It could kick you into a higher Medicare Part B and Part D premium or into a higher level of long-term capital gains rate,” he said.
If that’s the case for you, there are strategies you can use to offset the income, including tax-loss harvesting (selling losing investments to offset income) or making contributions to charity directly from your IRA if you’re eligible. Talk it over with your tax preparer before making any moves.
“The main point is to highlight the importance of proactive personalized tax planning,” Maye said. “It is not a one-size-fits-all exercise.”
8. What’s happening with capital gains?
Capital gains rates could be in for changes, though nothing is decided yet.
First, understand that short-term capital gains are taxed at ordinary income tax rates.
When possible, most individuals are better off holding investments for longer than one year so they qualify for more favorable long-term capital gains rates, Maye said.
He said he believes long-term capital gains rules will remain at the current levels — 0%, 15% or 20% — for most individuals.
“For individuals currently in the top marginal tax bracket, they might want to lock in the current highest marginal long-term capital gains rate of 23.8%, which is comprised of the 20% capital gains rate plus the 3.8% investment income surtax — the Obamacare tax,” he said. “If rates do rise for those individuals in 2022, they can do some things to mitigate the tax hit such as making charitable contributions in appreciated investments rather than cash.”
9. About those charitable contributions
You no longer have the ability to itemize your charitable contributions.
So instead, if you’re interested in donating to charity, consider your retirement account distributions.
First, individuals over age 70.5 years old are allowed to make up to $100,000 in qualified charitable contributions (QCDs) each year directly from their IRA to a charity, Maye said.
Importantly, once they turn 72, they can also satisfy all or a portion of their IRA Required Minimum Distribution (RMD) by making a QCD, he said.
For example, he said, if an individual’s 2022 RMD was $30,000, they could lower their reportable income by $15,000 by making a QCD of $15,000.
“As a planning point, the QCD can be made to multiple charities,” Maye said. “This is a powerful tool for individuals who need to manage their income level and are charitably inclined.”
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Karin Price Mueller may be reached at KPriceMueller@NJAdvanceMedia.com.
This content was originally published here.