Important Numbers and Tax News for 2022

As we bid adieu to 2021 and say hello to 2022, let’s review some important tax and congressional updates as well as retirement contribution limits to be aware of as we begin the new year!

Student Loan Interest Deferment Extended

Just when we thought the 0% interest deferment was ancient history, President Biden extended it at the last minute. From now until May 1, federal student loan borrowers will be relieved of payments. And unlike the last extension, the Biden Administration has not specifically indicated that this will be the last. Keep in mind, if you have some extra money burning a hole in your pocket, you may want to keep paying anyway. Every penny will go towards paying down your principal balance. In addition, if you are in public service, some much needed changes are occurring for student loan forgiveness whereby those who did not qualify before may actually see their loans disappear. And perhaps the $10,000 blanket elimination will eventually happen, but this still seems to be on the backburner for the Biden Administration even as some members of Congress are pressing for action.

Expanded Child Tax Credit in Limbo

For 2021, many parents received some financial relief in the form of monthly payments to help offset childcare costs. The Child Tax Credit, normally $2,000 per child, was increased to $3,600 for children under age 6 and $3,000 for children ages 6-17. And instead of waiting until tax time to receive the money, since July, parents could receive $250 or $300 each month per child. However, so far it does not look like it will be extended for next year. Keep mind that if you did not opt out of receiving the payments, the tax credit you claim on your 2021 taxes will be the remaining amount of the credit. The extension simply accelerated it. Please consult with a tax professional on how this may affect your tax liability in 2021.

HSA’s and Most Retirement Plans Get a Bump

No surprise here that HSA (Health Savings Account), 401(k), 403(b), 457(b), SEP IRA, and SIMPLE IRA annual contribution limits have increased. HSAs increased to $3,650 for individuals and $7,300 for families. The SIMPLE IRA limit is now $14,000 and a SEP IRA is up to $61,000 or 25% of net earnings, whichever is less. The 401(k), 403(b), and 457(b) annual limit is now $20,500. While the 401(k), SIMPLE IRA, and 403(b) annual limits are aggregated, the 457(b) is not. What does this mean? It means that I can contribute $20,500 to a 401(k) and $20,500 to a 457(b). However, I can only contribute up to $20,500 if I am eligible to contribute to a 401(k), SIMPLE IRA, and/or 403(b). For those over age 50, the catch-up amounts have not changed.

IRAs Not Changing Much

Unfortunately, the Traditional IRA and the Roth IRA limits remain at $6,000 total amongst all IRAs you own. The income limits to contribute to a Roth IRA have increased slightly. For 2022, you are eligible to contribute the full amount if you are single and your MAGI (Modified Adjusted Gross Income) is less than $129,000, phasing out completely at $144,000. For married filing joint, you must be under $204,000 until it phases out at $214,000. Some folks may be eligible and prefer to deduct contributions to a Traditional IRA (contribute on a pre-tax basis). For singles, the MAGI phaseout is $68,000-$78,000. For married filing joint, the range is $109,000-129,000. If only one spouse is covered by an employer retirement plan, that range becomes $204,000-$214,000.

And finally, the Mega Backdoor Roth IRA has survived (at least for now). A mega backdoor Roth IRA allows some folks to convert After-Tax 401(k) (or similar plan) money to a Roth IRA as long as your employer allows after-tax contributions and in-service withdrawals or you are no longer employed by the sponsor.

Tax Brackets and Other Updates

As usual, the standard deduction has gone up to $12,950 for singles and $25,900 for those who are married filing joint. Congress has also extended the $300 “above-the-line” cash deduction for charities. Those married filing joint can go up to $600. This means you do not need to itemize to receive the deduction. Tax brackets have also changed slightly. Remember, the brackets are progressive, meaning the last dollar of income you earn is taxed higher than the first. Your effective tax rate is typically less. For example, Sarah is single and her taxable income is $100,000 in 2022. She pays 10% tax on income up to and including $9,950. She pays 12% on anything over that until she reaches $40,525, and then the rate becomes 22% above that amount. The graduating rates continue until she reaches $100,000.

And finally, for those selling stocks or an investment property, the Long-Term Capital Gains and Dividends rate remains at 0% for singles with taxable income less than $41,675 and $83,350 for married filing joint. After that, 15% applies. Once you get above $459,750 (single) and $517,200 (married), you are taxed at 20%.

Conclusion

Well, that is probably enough for now! I know I am tired. Remember to review your tax situation each year (ideally before the new year) to ensure you are prepared and there are no surprises. Better yet, consult with a tax professional or financial advisor to review your situation to determine how these changes may affect you and what might be the best strategy for you.

Happy New Year!