Tax Law Changes That Could Affect Retirees in 2022
With the “Build Back Better” Act still sitting in the Senate, taxpayers await the fate of some significant tax changes for 2022.
While nothing is more certain in life than death and taxes (thanks Ben Franklin for that witticism), tax law changes can throw a wrench in your financial plan—especially when you don’t see them coming.
The good news is, we can forecast what changes the new year may bring and how they may affect our clients. As everyone prepares for a busy tax season ahead, it’s never too early to start thinking about the 2022 tax year.
Considering these potential changes now gives you and your financial plan time to adjust and prepare accordingly.
What Tax Law Changes Are Coming?
Below is a quick compilation of proposed tax changes for 2022.
Tax Brackets
Current tax bracket rates remain the same for now, though some policymakers have pushed for adjustments to the top bracket. Most income thresholds within the tax brackets increased by about 3% for 2022, marking the highest jump in four years. It’s important to note that the IRS didn’t change income tax rates (10, 12, 22, etc.); instead, the income thresholds within those brackets saw a jump due to inflation.
While subject to change, the current tax brackets for the 2022 tax year are:
- 10%
- Single filers: $0 to $10,275
- Married filing jointly: $0 to $20,550
- 12%
- Single filers: $10,275 to $41,775
- Married filing jointly: $20,550 to $83,550
- 22%
- Single filers: $41,775 to $89,075
- Married filing jointly: $83,550 to $178,150
- 24%
- Single filers: $89,075 to $170,050
- Married filing jointly: $178,150 to $340,100
- 32%
- Single filers: $170,050 to $215,950
- Married filing jointly: $340,100 to $431,900
- 35%
- Single filers: $215,950 to $539,900
- Married filing jointly: $431,900 to $647,850
- 37%
- $539,900 or more
- Married filing jointly: $647,850 or more
Surcharge
While tax bracket rates remain the same, some High Net Worth families may be subject to a 5% or 8% surcharge in 2022.
New this year, couples with a modified adjusted gross income above $10 million (or $5 million for individual filers) will have a 5% surcharge applied to income earned above that threshold.
For those with a modified adjusted gross income higher than $25 million, an additional 3% surcharge will apply. This would be a total of 8% applied to those with incomes exceeding $25 million.
This surcharge tax is set to go into effect starting Jan. 1, 2022.
Estate & Trusts Surtax
Similar to the surcharge mentioned above, a 5% surtax will start applying to non-grantor trusts that generate income above an AGI of $200,000 per year. An additional 3% surtax (for a total of 8%) would apply to income above $500,000. This change will also go into effect at the start of 2022.
State and Local Tax (SALT) Deductions
Currently, taxpayers who itemize their deductions have a $10,000 limit on expenses relating to SALT property taxes. Starting with the 2021 tax year, that deduction limit raises to $80,000. This rule will apply to each tax year until 2031, at which time the SALT deduction limit will revert to $10,000 unless further legislative action occurs.
Net Investment Income Tax (NIIT)
Proposed changes include expanding the scope of the 3.8% NIIT to include specific income incurred through ordinary trade or business. This expansion would apply to those with income above $400,000 (or $500,000 for married filing jointly).
Additionally, this expansion would also apply to income taxed at the highest tax rate for trusts and estates. This rule is set to go into effect starting Jan. 1, 2022.
This change is important for business owners of limited partnerships or S-corporations, as these individuals may not have previously been subject to the 3.8% NIIT.
IRA Contributions
Starting this year, taxpayers with more than $10 million total in their retirement accounts (IRAs, Roth IRAs, deferred compensation, defined contribution plans, etc.) by the end of the prior taxable year will not be allowed to make contributions if their annual income is greater than $400,000 (or $450,000 for married filing jointly).
Any additional contributions made for those who fall under these conditions would be subject to an excise tax.
Contribution Limits for 2022
The contribution limit for those who participate in a 401(k), 403(b), 457, or Thrift Savings Plan will increase to $20,500. The catch-up contribution for those 50 and older will remain unchanged at $6,500.2
Contributions to traditional and Roth IRA accounts will remain the same at $6,000. The IRA catch-up contribution is also unchanged, allowing those 50 and older to contribute an additional $1,000 to their IRA account.
As a reminder, there are income ceiling caps for those contributing to certain retirement accounts. Those earning more than $144,000 (or $214,000 for married filing jointly) are not eligible to contribute to a Roth IRA account, for example.
Contributing the maximum amount to eligible retirement accounts is a simple yet effective way to reduce your taxable income for the year. If you’re concerned about getting hit in other areas by these proposed tax changes, contributing to your retirement accounts could help offset your potential tax obligations.
How to Manage Tax Law Changes
At Legacy Wealth, we approach financial planning with a tax-minded focus. If you’re concerned about upcoming tax law changes, we can sit down together and discuss how to protect your financial standings. Adjusting your strategy based on potential changes is something we can work on now, so you can avoid unwelcome surprises in the coming year.
As you start preparing for the new year, don’t hesitate to reach out and give us a call. We’re here to help retirees as you grow, manage and protect their wealth.
