2022 Federal Tax Update

2022 Federal Tax Update

February 3, 2022

Tax planning is all about implementing a strategic plan when managing an estate or planning for retirement. That said, it’s challenging to create an infallible plan, given the possibility of changes within the federal government every couple of years. Of course, the current uncertainty surrounding potential tax changes this year, especially after the failure to enact change in 2021, further restricts the ability to create meaningful strategies without knowing the long-term impacts or future changes in tax laws.

Thankfully, some adjustments in tax laws for 2022 have been made due to inflation. As prices increased significantly in 2021, surpassing recent years, limits were raised in all tax brackets, as well as retirement plan contribution limits, gifting levels, and estate tax exemptions.

Retirement Account Contribution Limits

Maximizing contributions to retirement accounts can be one of the most effective retirement planning strategies. As the contribution limits have risen for 2022, we encourage you to act as soon as possible to take advantage and maximize your allowable contributions.       

For instance, the contribution limits for employees who participate in 401(k), 403(b), most 457 defined benefits plans, and the federal government’s Thrift Savings Plan has increased to $20,500. 

The catch-up contribution limit for those 50 and older remains at $6,500. That means workers over 50 can defer income tax on as much as $27,000 in their employer-sponsored qualified plans.

Limits on contributions to traditional and Roth IRAs remain unchanged at $6,000. IRA contributors, ages 50 and older, can make an annual catch-up contribution up to $1,000, equaling $7,000 in total.

The SIMPLE contribution limit for 2022 is $14,000, and the catch-up for those over 50 is $3,000 for a total of $17,000. 

For self-employed business owners, the maximum SEP-IRA contribution limit for 2022 has been increased to $61,000, which is up from $58,000 last year. There are other rules surrounding SEP contributions, especially if you have employees, so be sure to check with your tax preparer before making a contribution in any given tax year.

Gift and Estate Tax

The annual gift tax exclusion increases to $16,000 per person in 2022, after four years of holding at $15,000. While the increase isn’t necessarily significant to the typical giver, the amount can be substantial for the recipient, especially if done annually. Because we are living longer, our heirs are often approaching or within their retirement years before they receive their inheritance. Annual gifting gives your beneficiaries some of their inheritance while you’re still alive and allows you the opportunity not only to see them enjoy it but turn a keen eye towards how they spend it.  

As an asset management strategy, annual gifting can reduce the size of your taxable estate. That said, one significant change in 2022 is the increase in estate exemption. Due to inflation, the exemption is being raised to $12.06 million from $11.7 million per individual. A married couple can now shield a total of $24.12 million from federal estate taxes or gift taxes.  Keep in mind that while the estate exemption has increased for now, the current law will sunset in 2025, which means it’s an excellent time to consider making lifetime gifts to utilize the exemption before it is reduced by half.

Charitable Giving

For 2021, the usual AGI ceiling on charitable contributions was revised to allow taxpayers to deduct up to 100% of the AGI for cash contributions made to qualified charities. The IRS, as of January 13, 2022, has not announced the ceiling for the tax year 2022, but we hope to see an announcement in the near future.

Aside from monies donated, gifting highly appreciated assets, such as stock, from taxable accounts, directly to qualified 501(c)(3) charities or Donor Advised Funds continues to be an excellent strategy to reduce taxable income and avoid capital gains.  

Will Income Tax Rates Go Up in the Future?

The chance that Congress will enact any meaningful change in 2022, a pivotal election year, remains uncertain. We encourage you to monitor potential changes closely and work closely with your accountant and estate planning attorney to explore potential strategies.

Sources:  www.irs.gov, Kiplinger

Articles and Commentary

Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.

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