Ep. 142 – 2022 Tax Guide and Updates

Are you aware of the tax situation for 2022? Things have changed when it comes to tax as they do every year and 2022 is no exception.

It is important to have information on what you can do and how you’ll be impacted as you proceed to make your financial goals for 2022.

In this episode of the Secure Your Retirement podcast, we talk about the 2022 tax changes to help guide you to better financial goals. We discuss ordinary tax, long-term capital gains, Medicare, social security, and some other things about tax that you need to know for 2022.

In this episode, find out:

  • The expected changes on the ordinary tax situation according to your tax bracket.
  • A tiered tax system – understanding the adjusted gross income and how to calculate your effective tax rate.
  • Understanding why tax rates will go up in the near future as you plan and strategize.
  • The changes in standard deductions and how they will affect your income in 2022 as a single or married earner.
  • How your salary deferred retirement plans will be tax impacted.  
  • The capital gains tax changes and why it’s advantageous to have a long-term capital gain plan.
  • Why social security is taxable, and to what degree of income it’s taxable.
  • The expected increases on your Medicare Premium Part B in 2022.
  • How income outside of your social security will lead to a penalty or reduced benefits.
  • How you can contribute to a Roth IRA in 2022 and why you should.

Tweetable Quotes:

  • “The long-term and short-term thing does not apply at all in the ordinary income tax.”– Radon Stancil
  • “There are limitations as to how much income you can make if you take social security early.”– Murs Tariq

Here’s the Full Transcript:

Radon:Welcome, everyone, to our podcast. Today is the version that we usually reference as Retirement in Action we have a couple different formats that we try to cover. One of those is an interview. The other is what we call Retirement in Action. That’s where Murs and I take this opportunity to hit a topic that we’re getting questions about or that we’ve dealt with within the last little bit within our practice, and hopefully by the fact that somebody else asked the question, we always say that probably you have those questions as well. Today, we are going to talk about a topic that everybody wants to talk about when it comes to their planning and their concerns. That is the tax code. We are really calling this particular episode The 2022 Tax Guide.  
 Now, there have been adjustments, none of which are major from ’21 to ’22, but we wanted to take you through those numbers and give you some things to think about when it comes to different aspects. Today, we’re going to talk a little bit about, I’m going to give you an outline here, we’re going to talk about our ordinary tax income to tax limits. Federal, we’re talking all federal, the amounts, limits, things like that, that we can put into our 401(k), our traditional IRA, a Roth IRA. Then also, we’ll talk just a little bit about dividends. A really big one is taxes on Social Security, at what those points are. We’re going to hit a little bit on Medicare Part B premiums, as to how those are affected based on the different parts of the tax code, and then we’ll talk about a couple other little things as well, but we hope this will at least give you a nice overview of the tax code, tax situation for 2022.  
 I will you that we’re going to go through a lot of numbers. We’re going to go through a lot of different scenarios. If you’re listening to this, you’re driving, you’re walking, do not sweat it. We have a blog written on this very topic, it’s right on the website. All these numbers, all these details are going to be right there for you, and we are glad to be able to provide this for you. I say we jump right in, Murs. If you want to give us your observations around the ordinary income tax, any things you see there, and then we’ll just have a nice conversation on this.  
Murs:Yeah, sure. The ordinary income tax, that’s the tax that you pay based off of what your income is for the year. For the most part, you’re not really seeing any changes to, say, the tax percentage level, and so basically, what we have is you’ve got a couple different, we put them in the phrase of brackets, tax brackets, “Hey, what tax bracket are you in? Or what are you filing in? Or what did you end up paying from a tax percentage?” Your income, however much money you make through the year, whether it’s W-2 or 1099, that all adds up and then lands you into a tax bracket, and those brackets are unchanged, so the brackets are 10%, 12%, 22%, 24, 32, 35, all the way up to 37%.  
 Now, how you land into one of those or a multiple of those depends on what your earnings are for the year, and so we’re not going to go through all of the details, but what I want to do is just to give you a little bit of an idea as to what the numbers are. Then also, there have been some changes as to the range that qualifies you into a certain bracket versus another. Let’s just start at the beginning. If you have earnings or income of 20,550 or below, then you are in the 10% tax bracket. The next level is basically from that 20,550, all the way up to 83,550. Now, you are in the 12% bracket. Then it goes to you’re making 178,000, you’re now in the 22% bracket, and it keeps going up, so the more income you make, the more you’re going to pay in taxes. It’s on this stepping type of rate.  
 Radon, I’m going to ask you a question here in a second because sometimes a confusion happens that says, “Well, according to the table, if I made $440,000 this year, that’s going to put me into the 35% tax bracket,” and sometimes there’s a confusion as to, is every single one of those dollars taxed at that 35%? That’s something that I would like to go over very briefly.  
 But before I do that, just to give you an idea of what to the changes are, for example, if you were in the 22% tax bracket for 2021, you had income of up to 172,750 for the year, that puts you into the 22% tax bracket. The only change for all of the brackets has been a few thousand dollars, so now, you can actually make up to 178,150 and still be in that 22% tax bracket. Last year, it was 172,750. Now, the threshold has gone up by about $6,000, a little bit less than that to 178,150 to keep you into the 22% tax bracket, so all of the brackets have extended a tiny bit, a few thousand dollars, so that’s really the only change when it comes to ordinary income tax levels. Back to my question, Radon, can you give us a high level as to how our tax system when it comes to income taxes?  
Radon:Yeah, our tax system is what is called a “tiered tax system.” Now, we’re going to work off of what the tax code or what we would have on our tax return, which is what’s called an “adjusted gross income.” An adjusted gross income is after you’re able to take either a standard deduction or other deductions, whatever those might be, and then that’s how we start to break down what our income tax is. Let’s assume that we’re now talking about what’s called our “adjusted gross income,” we’ve taken our standard deduction, and we start there, so whatever that is.  
 From zero after that number, from zero to $20,550, on that section of money, I owe 10%. I’m going to go back to actually your scenario, Murs, and let’s say that somebody owes or somebody makes, has an adjusted gross income of $440,000. Now, I’m going to walk through a bunch of numbers. Don’t worry. Remember, I told you we’re going to have this all in our blog, so don’t think about having to write all this down, but the way it works is from zero to 20,550, on that section of money, the first $20,550, I only pay 10% tax on that segment of dollars. Then everything above $20,550 all the way to $83,550, on that section of money, I owe 12%. Now, from 83,550 to 178,150, I owed 22%. From 178,000 to 340,000, I owed 24%, and then from 340,000 to 430,000, I owed 32%. Then on that last $9,000, from 131,900.  
 Remember, Murs said I made it to the 35% tax bracket, I made $440,000, I only owe 35% on the last $9,000. The rest of it was at 32, 24, 22, 12, and 10. If I want to know what my average tax bracket is, what I would do is do all that math, come up with what tax I’m going to owe, and then divide it by the whole number, and that would be my effective, you’ve probably heard of that term before, my “effective” tax rate, meaning I’ve paid it at different tiers throughout the whole process.  
 That is going to lead us now to a different conversation. I hope you understand now, a tiered tax system, and I want to now bring up a topic when it comes to income tax that comes to this idea that we get sometimes around a Roth conversion. A Roth conversion fits really nice when you understand this tiered system. When you get it, you go, “Aha. I understand now how I would pay a certain tax rate on a piece of money.”  
 I’m going to go back to this scenario of let’s pretend that your income is right now at, say, $85,000. Your adjusted gross income is at 85,000, and you say, “I want to convert as much as I can and stay in my current tax bracket. If you’re at 85,000 married filing jointly, all these numbers I just went through are married filing jointly, the single tax code is the same tiering, but the dollars I can make as a single person is not as much as I can earn if I am filing married, ‘kay?  
 All right, so I make $85,000 and you say, “How much can I convert and still stay in the 22% tax bracket?” Well, I can convert everything from 85,000 all the way to 178,000 and all of that conversion’s going to be at a 22% tax bracket. If I convert anything above that 178, it’s going to only on the part that I go above that, so if I go above that by 10,000, that extra 10,000’s going to be converted at 24%. A lot of people say, “I want to make sure go above the bracket that I’m in. What’s my range within that bracket?”  
 Now, I will say this real quick, if you’re listening to this and you’re thinking, “Oh, my goodness. This is really overwhelming and I’m trying to figure it out and I want to see how this works,” we do have a software program that can actually do all this math for you so you can see what it looks like, and we’re glad to be able to help you with that if you’d like. If you go to the website, we’ve talked about this before, you can click on the button at the top right-hand corner, and just be able to schedule a 15-minute phone conversation with Murs and I, and we’ll be able to walk you through if that makes sense or not. Anything else on this, Murs, maybe on that topic or anything else around the ordinary income tax?  
Murs:Just one thing that I think is worth noting, and especially if you’re trying to do some longer-term planning over the next few years, like Roth conversions, a tax cut was put into effect a few years ago called the Tax Cub Jobs Act and that is set to expire in 2026. What that means ultimately is that if nothing changes in legislation right now, tax rates, the marginal tax rates that we just discussed, some of them are going to be going up, not crazy, but they are going to be going up.  
 To give you an example, if you’re in the 12% bracket in 2026, that 12 is going to go to 15. The 22 is going to go to 25%, the 24 is going to go to 28, so those three sections of the marginal tax brackets, those are going up in 2026 due to an act that was put into place years ago expiring. Something to think about as you are doing some planning, some strategy. Tax rates are going up a little bit here in the near future.  
 But that’s really all I’ve got for ordinary income tax. I think it is important to always revisit every single year when we’re talking about thresholds and limitations, as far as what we can put into plans, what type of plans that we have. Those numbers are supposed to be moving around with inflation, so almost every year we do get an increase into what we can utilize from a tax perspective, so the standard deduction has gone up a small amount, but it has gone up. If you are single, the standard deduction last year in 2021 was 12,550. In 2022, this year, it’s 12,950. Married filing jointly went from 25,100 to 25,900, so a little increase there. [crosstalk]  
Radon:Anyway, Murs, I’m sorry, before you go more on that, we need to really clarify here, we are just basically reading numbers to you and maybe trying to give you some understanding. We are not CPAs. But could you just briefly, I think you went into that, just to kind of say, what is a standard deduction? How would that work as far as a person thinking about their income?  
Murs:Yeah, I mean, essentially, these changes happened a few years ago to where they really increase the standard deduction, and basically, it comes right off of your income. Everyone gets the standard deduction. The amount that you get depends on whether you’re single or you’re filing married, filing jointly, and it comes right off. Let’s say you make 50,000 and you are single and your income is 50,000 for the year. Well, effectively after the standard deduction, you take 12,550 off so you’re right at that 37,000 income amount. You automatically get a chunk of your income taken away for what they call the “standard deduction,” and then things get added to that, but the other way that someone may file is not doing the standard deduction, but they’re doing itemized… What’s the word here, Radon? Itemized? Or are they itemized?  
Radon:It’s itemized deductions. Itemized deductions.  
Murs:Yeah, itemized deductions. A lot of people have realized that because the standard deduction got so strong over the past few years that it’s really difficult to itemize your deductions anymore, but that’s a whole different conversation, and again, we are not CPAs, we’re just giving you some information here.  
 Another change that has happened and I noticed it not too long ago, which is the 401(k), 403(b), 457 plans, all those retirement plans that you get to contribute to throughout the years, that number has gone up a little bit, so if you do salary deferral, so out of your paycheck, every single pay period, some money goes into one of these retirement buckets, the maximum has gone up from 19,500 to 20,500, so $1,000 extra per year that you can put into that. Then on top of that, if you’re over age 50, you can do what’s called a “catch-up contribution.” This number has not changed, but it’s still there, so if you’re over 50, you can do salary deferrals this year of 20,500, and then also you get to take advantage of the catch-up, which is $6500 a year, so if you have the mindset to maximize your 401(k) or your 403(b) contributions, you can really put in from your salary $27,000 this year, so that’s a nice number that has gone up a little bit.  
 If you’re self-employed and you utilize what is called a “SEPP plan,” stands for “self-employed pension plan,” kind of works like a 401(k), kind of like an IRA, a little bit of a hybrid, has some different funding rules, but the maximum that you can put into that has gone up to 61,000 this year from 58,000 last year, so that’s a nice increase as well. What else is on here? If you have an FSA or an HSA, those numbers have gone up a little bit. HSA is a health savings account that you can contribute to if you have a qualifying medical plan. FSA is usually with an employer, some of those contribution limits have gone up as well. Anything you think I’m missing here, Radon?  
Radon:No, I think you covered all those really well as far as all those different numbers, so I think it’s pretty good for us to move on here briefly. We’ll talk a little bit about capital gains. Now, capital gains are if you have a stock, for example, that you have a gain on, or anything that’s long capital gains, a property, but let’s just talk about stocks, and I have a capital gain on it, if I sell that stock prior to a year, then it’s called “short-term capital gains.” What that means, you just count it as income. It goes back up in that column that Murs and I were talking about as ordinary income, so all those brackets apply. If, though, I hold a stock for longer than 360 days, meaning longer than a year, and I sell it, any gain that I’ve got on there is a long-term capital gain.  
 Just so you understand that, again, this is a little bit of a tiered system as well, just not quite as much as the tiers that we have on the ordinary income. Basically, in 2022, I can make up to 83,000 of long-term capital gain if that’s what I’m considering and I can qualify for a 0% tax on that when I look at that. Now, there is some calculations to go in here, and so I’m giving you, again, some rough numbers, and remember, we’re going to refer you back to the CPA all the time on this. But then I can go up all the way to 517,000 and I only pay 15%, so you’ll notice that that’s a lot less than the ordinary income tax, and so that’s extremely important. That’s why it’s advantageous if we have a plan where we want to hold long-term capital gains.  
 Now, if I do more than 500,000 in long-term capital gain, or more than 517,000, I’m going to pay 20% on that. Again, this may or may not apply in your case because it does not apply at all to IRAs, Roth IRAs, 401(k)s, 403(b)s, 457s, all of those, when I pull the money out is when I’m going to pay tax on it. This is talking about a stock that’s not in that kind of an account that you pay long-term and short-term. This long-term/short-term thing does not apply at all in the ordinary income tax, okay?  
 All right, Murs, can you just help us with a nice little overview here on the Social Security section? I think a lot of people wonder, how is it that Social Security gets taxed and what’s the math on that as to at what point do I start to get taxed, so if you can just run through those numbers with us briefly?  
Murs:Yeah, yeah. We have this conversation all the time, that a lot of people are surprised Social Security is taxed at all when it’s something that you’ve been paying into for quite some time and you receive it at a qualifying age of 62 or above. But yeah, it is taxable, and really, there’s two thresholds that you need to know, and by the way, there are notes changes here from 2021 to 2022, so it’s exactly the same as last year. But if, say, you’re married filing jointly, you’re collecting Social Security, and your income is anywhere from 32,000 to 44,000 a year, then up to 50% of your Social Security income will be taxable, so if you get 2,000 a month from Social Security, up to $1,000 of that is going to be considered as taxable income.  
 Now, in the scenario where you make a good income in retirement, well, then that number is going to go up as far as the percentage as to how much is taxable, so if you make, again, married filing jointly, more than 44,000 of annual income, then the number goes from 50% to up to 85% of your Social Security is now taxable. The numbers are a little bit different if you’re filing single, but the idea here is that Social Security can be taxable, for a lot of people it is taxable, it’s just as to what degree of income you have as to how much of your Social Security will be taxable.  
Radon:All right, real quick, I want us to go through these next couple of topics. I know that we try to keep these Retirement in Actions at around that 30 minute or less mark, so we know we’re going through a lot, and we hope that you’re hanging in there with us. I do want to talk a little bit about the Medicare Part B premium, and the reason why I want to mention this is I think of as a percentage, this is quite a jump this year. In 2021, for example, if a person made anywhere from zero to 176,000, the premium on their Medicare Part B was $148.50. That is this year, in 2022, going to jump from $148.50 to $170.10. That’s monthly, by the way, a monthly premium, so that’s taking it up little bit as a percentage. I mean, again, the difference between 148.50 and 170.10’s probably not going to make a difference in most people I saying whether or not they get to go on vacation, but the reality is percentage-wise, that’s quite the jump.  
 Now, if I make over 182,000 up to 222, these go up, and I’m not going to read through all those, but it’s tiered very much like everything else. The higher the income, the higher the premium, so just keep that in mind as you’re thinking about that. But I didn’t want to say a lot on that, I just want you to know that there are premium increases coming in 2022 on your Medicare Part B, so think about that. It might be something that you need to adjust in your income plan. It’s not, again, earth-shattering, but it is an increase.  
 Murs, can you talk a little bit about this? This comes up a lot, if I’m taking Social Security under what’s called “full retirement age,” how much money can I make and it not be penalized?  
Murs:Yeah, yeah. You can take Social Security as early as age 62, but what you have to remember is that if you’re taking it before full retirement age, which for a lot of us is 66 and the months, there’s age 67. If you’re taking it before full retirement age, then you could be subject to reduced benefits if you’re making, say, too much money while working or some other type of income scenario. You don’t have to make a lot before your Social Security could be reduced.  
 Let’s say you file at 62, but you’re also making 25,000, $30,000 a year through a part-time job, your Social Security could be impacted. The number here for 2022 if you make more than 19,560 in income outside of your Social Security, then that’s Social Security is going to be subject to a penalty or reduced benefit, so something to consider. A lot of times, we like to think about retiring early at 62, drawing that Social Security, but also have some other side gig or something like that that eventually or possibly generates too much income and we get penalized for, so just keep that in mind that there are limitations as to how much income you can make if you take Social Security early.  
Radon:All right, our final topic to close us out today is on the Roth IRA. The Roth IRA, you can contribute up to $6,000 a year under 50, 50 and above can do another thousand, so 7,000 into the Roth, as long as you had that much earned income, so if you only made a thousand dollars, you can only contribute a thousand dollars, but if you earned $6,000, you can contribute six, if you earned 10, you can contribute seven if you’re over 50, six if you’re under 50.  
 Now, there is a little thing to consider on that, and that is how much income can I make. The phaseout begins in 2022 for a person married filing jointly at 198, so ultimately, you’re going to start to get phased out of how much you can contribute once you’re married filing jointly is above 198, 125,000 for a single, and then you’re completely phased out married filing jointly at 208,000 and on a single 140, so if you’re a good income earner, the Roth may not be a consideration, but I will tell you that if you can contribute to the Roth, it is something to consider. We find it to be very, very, very beneficial, and when you run the numbers out, we have some clients right now that have very sizable Roth IRAs, and I will tell you that it’s a super exciting thing to know that this money is growing tax-free and you can get it out tax-free, and so it’s a huge, huge advantage. But anything else at all, Murs, on this that we might have missed or skipped over before we conclude?  
Murs:No, I mean, this has been good. I know that we threw a lot of numbers at you. Like Radon said, there will be a blog published that has all these numbers in it, and it’s good stuff to know, especially as we sit here in January at the beginning of the year and you’re making some financial goals, some things that you want to tweak with your plans, your savings, and everything like that, it’s good to know what you can do and what the impact is going to be, so that’s the whole purpose of this episode.  
Radon:All right, everyone, thank you so much for listening to us. We are so excited to be able to share this with you. It’s something that Murs and I look forward to every single week. We hope you have a great week. We’ll talk to you next Monday.