While the first months of the year are busy with filling out income tax forms or sending documents to your CPA, lowering your taxes should be a year-round effort. Being aware of tax law changes and how you can benefit is a strategic part of your financial planning. The most notable tax law changes that have gone into effect so far for 2022 are summarized below.
Retirement savings get a boost in 2022 through increased limits for contributing to retirement accounts. The maximum for employee 401(k) contributions rises to $20,500, while the catch-up contribution for those age 50 or older remains at $6,500 for a total of $27,000 in 401(k) savings. For those individuals with Solo 401(k)s or similar plans, the contribution limit rises to $61,000 in 2022, with additional catch-up contribution potential of $6,500 for those age 50 or older for a total of $67,500 for Solo 401(k) savings. Unfortunately, the limits are unchanged for Individual Retirement Accounts (IRA) at $6,000 per person with an extra $1,000 for those age 50 and older.
Health Savings Accounts
If you are enrolled in a health insurance plan that is eligible for a Health Savings Account (HSA), you can contribute more in 2022. The limit is $3,600 for singles and $7,300 for families, plus $1,000 catch-up for those 50 and older. HSAs are a great tax tool to reduce taxable income by the amount contributed and can then be withdrawn for medical bills tax-free. Contributions are allowed without regard to income, but are not permitted once you sign up for Medicare. The accounts can also serve as a quasi-retirement account as contributions can be invested and build up year after year to be withdrawn at age 65 or older for any expense, though taxes are due if used for non-medical costs.
Backdoor Roth Contributions
While these remain a target by Congress to no longer be allowed, no action has been taken yet to prevent them in 2022. This strategy allows you to make a traditional or non-deductible IRA contribution and immediately convert it into a Roth IRA, regardless of income. It also applies in 401(k)s to allow higher conversion amounts thanks to the greater contribution limits. However, keep in mind this strategy is still on Congress’s radar and may be banned for next year, or retroactive to Jan. 1, 2022, or July 1, 2022, if passed later in the year. If early-year conversions are allowed to stay in place, retirement savers could get one last year to supersize Roth accounts. Those willing to take the risk of having it retroactive may want to contribute and convert now.
- Please keep in mind that you could incur a taxable amount for a backdoor Roth conversion if you have pre-tax IRA holdings. This should be reviewed with your tax preparer before implementing.
In 2022, you can be more generous by giving away $16,000 to each person without gift tax consequences. This is an excellent family wealth transfer technique, particularly for those individuals who likely face future taxable estates.
For those who do not itemize deductions, the IRS previously allowed above-the-line deductions up to $300 per taxpayer ($600 for joint filers). That deduction expired and now only taxpayers who itemize can deduct charitable gifts for the 2022 tax year. Don’t count this out yet as it could be added to tax legislation this year, especially after 400 nonprofit organizations wrote recently congressional leaders asking for an extension of the deduction.
The allowed deduction for dental and health care expenses was set to rise to 10% of adjusted gross income (AGI) but was kept at 7.5% permanently by the Consolidated Appropriations Act in 2021. This is a win for aging Americans as it continues to include expenses for medical-related home improvements and can offset rising medical insurance premiums and out-of-pocket deductibles.
Property and State Tax Deductions
A big push in Congress last year was to eliminate the State and Local Tax (SALT) itemized deduction cap of $10,000. While no change was made, it remains part of the negotiations for a tax bill in 2022. Experts believe it could be raised as high as $80,000 but phase out for higher earners.
Meals and Entertainment
Business owners will be allowed to continue deducting 100% of the cost for food and beverages at restaurants before reverting to the 50% limit in 2023.
Potential Changes Ahead
Expect more changes and extensions this year as Congress continues to grapple with tax reform. Among changes we could see before year-end:
- Delayed Retirement Account Withdrawals: The age for starting Required Minimum Distributions (RMD) could be pushed back as late as age 75. Anyone turning 72 this year, the current age to start RMDs, may want to be patient and wait until later in the year in case the age is changed.
- Student Loan Assistance: If you have student loans, you may not need to rush to pay them off as employers could be allowed to contribute to an employee’s retirement plan the equivalent amount of the employee’s student loan payment. The catch is that employers need to add this benefit. The goal is to help young workers in debt start saving for retirement sooner.
- Tax Rate Increases: With benefits come a price and as expected high earners are targeted to offset any tax reductions by paying higher tax rates. This includes limiting retirement contributions for those with high account balances. Also favored is raising the capital gains tax from 23.8% to 28%. These high earners may want to act now in hopes any tax reform will not be retroactive to Jan. 1, 2022.
Before making any decisions, it’s always wise to consult with your CPA or financial planner. SageVest Wealth Management goes above and beyond the services of traditional investment and financial advisors. We provide a true wealth management approach that integrates your investment and broader financial decisions such as taxes under one roof. We invite you to contact us to learn how you can make a wise investment in your future.