Now that 2021 has wrapped up, it’s time to focus on 2022. The IRS has made a few changes to tax laws that will apply to the 2022 tax year. It’s important to know the changes and how they’ll affect you. Continue reading to learn the tax changes for 2022.
You will be able to put more into your retirement savings
In 2022, you will be allowed to put away up to $20,500 into your employer-sponsored retirement plan (401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan). If you are 50 or older, you will be given a catch-up contribution limit of $6,500. Even if you can not reach the contribution limit, be sure that you are taking full advantage of any employer match program you are entitled to.
For IRAs, there is not a contribution level change so it will stay at $6,000, or $7,000 if you are 50 or older. However, there could be changes to the backdoor Roth IRA method. The backdoor Roth IRA is when someone makes a non-tax deductible contribution to an IRA and then does a Roth conversion to have little to no tax liability. The potential legislation aims to put income limits for new contributions and changes to distributions.
The standard deduction is changing
The standard deduction is increasing $400 for single and married filing separate filers, to $12,950. For joint filers, the standard deduction is increasing by $800, to $25,900. This can give you a bit of a tax benefit, especially since you won’t have to spend the time itemizing deductions.
The tax brackets are also changing
Due to the rise in inflation, the income tax brackets are changing. The new rates are as follows:
- 12%: single filers, $10,275; joint filers, $20,550
- 22%: single filers, $41,775; joint filers, $83,550
- 24%: single filers, $89,075; joint filers, $178,150
- 32%: single filers, $170,050; joint filers, $340,100
- 35%: single filers, $215,950; joint filers, $431,900
- 37%: single filers, $539,900; joint filers, $647,850
Social Security receivers are getting a higher cost of living increase
For 2022, people who receive Social Security benefits will face a 5.9% cost of living increase. This could cause their tax liability to increase a bit unexpectedly. It could also potentially move you to a higher Medicare Part B and D premium or a high long-term capital gains rate. Using income off-setting strategies can help you prevent an unseen tax bill change.
If you have questions about your 2022 taxes, contact us at Plan A Wealth Management. We will be able to give you some thoughts on tax planning and help you get the best outcome possible, but you should always consult a tax professional regarding your specific situation as we do not provide tax or legal services. Being proactive and planning as the year goes on gives you a better chance of having a great tax season. Give us a call to get started today.