A new year brings a variety of new tax laws to concern yourself with. For anyone working on their retirement planning or in retirement, it’s crucial to keep on top of the new tax laws in 2022 because they will impact your plans – even slightly.
Ordinary Income Tax Changes
Your ordinary income tax, or the taxes you’ve paid all your life, aren’t going to see many changes in 2022. We’re seeing a few tax brackets, including:
Earnings will determine which bracket(s) you fall into this year. While the percentages haven’t changed this year, the income ranges have changed. For example:
- Income of (single: $10,275 or married: $20,550) or below – 10%
- Income of (single: $10,276 – $41,775 or married: $20,551 – $83,550) – 12%
- Income of (single: $41,776 – $89,075 or married: $83,551 – $178,150) – 22%
- Income of (single: $89,076 – $170,050 or married: $178,151 – $340,100) – 24%
- Income of (single: $170,051 – $215,950 or married: $340,101 – $431,900)– 32%
- Income of (single: $215,951- $539,900 or married: $431,901- $647,850) – 35%
- Income of (single: $539,900+ or married: $647,850+) – 37%
However, if you make $432,000 as a married couple, you would be in the 35% tax bracket. Due to being in the tiered tax system, you would pay into all the previous tax brackets. The first $20,550 is taxed on 10%, the amount of money from $20,551 to $83,550, you’ll pay 12% and so on.
So, you’re not paying a flat 35% in taxes. In fact, you’re only paying 35% on $99 if you made $432,000.
You can determine your effective tax rate by calculating the sum of the money you pay in taxes divided by your adjusted gross income. For example, if you paid $100,000 in taxes on an adjusted gross income of $432,000, you would use the following equation to determine your effective tax rate: ($100,000/$432,000) * 100 = 23.15%.
If you have a Roth IRA, you can convert some money to remain in your tax bracket using a Roth conversion.
For example, let’s assume that:
- You have an adjusted gross income of $85,000
- You want to convert as much as possible and stay in your tax bracket of 22%
In this case, you can convert from $85,000 to $178,000 at the 22% tax bracket
If you need someone to walk you through these figures based on your exact income, we can help you with that. In fact, our software will outline all these scenarios for you to help you better understand what you can do with your money to save on taxes.
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Note: Tax cuts were put in place under the Tax Cuts and Jobs Act of 2017. These tax cuts are set to expire in 2026, but this can change if no changes are made by then. In 2026, this would mean that a person in the 12% tax bracket would be bumped up to a 15% tax bracket. A few other brackets will go up, too.
Standard Deduction Changes
The standard deduction has gone up in 2022, but it is a small increase. However, when trying to secure your retirement, every dollar counts. Changes to the standard deduction are:
- Single person: Deductions are up from $12,550 to $12,950
- Married person: Deductions are up from $25,100 to $25,900
While the increase is small, it is an excellent way to save a little more money. Standard deductions come directly off your income every year. Let’s assume that you make $50,000 as a single person. The standard deduction pushes your adjusted gross income to $37,000.
Itemized deductions may also be an option for you.
However, due to the higher standard deduction, it may not be in your best interest to itemize deductions anymore. You really need to sit down with a CPA who can look over your current income and tax situation to find the best strategy to keep your tax burden down.
401(k), 403(b), 457 Plan Changes
Are you doing salary deferral into one of these retirement plans? If so, there have been changes that allow you to put a little bit more money into these accounts. The maximum that you can put into these accounts has gone up $1,000 from $19,500 to $20,500.
On top of that, if you’re over age 50, you can make a catchup contribution.
If you’re over 50 this year, you can make automatic salary deductions of up to $20,500 and put up to $6,500 as a catchup this year. These catchups allow you to put $27,000 into these accounts in 2022.
SEP Plans for the Self-employed
A self-employed pension plan, or SEP plan, works like a 401(k) and IRA hybrid. You can contribute $61,000, up $3,000 from the year prior.
FSA and HSA
If you have an FSA or HSA, the contribution limits on these two also went up.
- FSA – From $2,750 to $2,850
- HSA – From $3,600 to $3,650
Capital Gains Changes in 2022
New tax laws for capital gains are also in place in 2022. For example, if you have a stock with a capital gain and sell it prior to one year, it’s a short-term capital gain that is considered regular income.
However, if you held the same stock for over 365 days, it’s a long-term capital gain.
In 2022, you can have a long-term capital gain of $83,000 without having to pay taxes on it. However, there are a few calculations that you need to know here:
- You can go up to $517,000 with a 15% tax rate
- $517,000+ has a 20% tax rate
It’s important to note that these factors do not count for a 401(k) or your normal retirement accounts.
Social Security Taxes
Social Security is taxed for some individuals, and this is a shock for many people. Social security is taxable if you are:
- Married and have an income of $32,000 to $44,000 per year. Up to 50% of your social security income is taxable.
- Married and making over $44,000 in annual income. Up to 85% of your social security income is taxable.
Keep in mind that the figures are different if you’re single.
An example to go with these figures is to assume that you have $2,000 a month in social security and have a taxable income of $40,000. You’ll have to pay taxes on $1,000 of the $2,000 you have from Social Security in this scenario.
Medicare Part B Premium Rise
In 2021, if a person made $0 to $176,000, premiums for Medicare Part B were $148.50. However, in 2022, this premium is now $170.10. Since these are monthly premiums, this is a major difference.
If you make over $182,000, you will pay a higher premium based on a tiered rate.
While the premium increase may not seem earth-shattering, it is still worth considering.
Social Security Under Full Retirement Age
If you’re taking Social Security and are under the full retirement age, you can make $19,560 before being penalized at age 62. Retiring early and drawing Social Security while still having a part-time job can have penalties attached, which every retiree should know.
Roth IRA Contribution Changes
A Roth IRA allows you to contribute the following amounts per year if you earned the following:
- $6,000 for anyone under 50
- $7,000 total for anyone over 50
You can only contribute what you earn, up to the above amounts. Additionally, there’s a phase-out at $198,000 for married couples filing jointly in 2022. However, if you make $208,000, you cannot contribute to the Roth account.
Roth IRAs are an excellent account to consider because money can grow tax-free in these accounts.
While this is a lot to take in, it’s crucial that you talk to a CPA to discuss the options you have available to better understand recent tax changes.
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