2022 | Tax Planning: Updates to Key Deductions and Exemptions

18 Jan 2022 | Tax Planning: Updates to Key Deductions and Exemptions

The spike in inflation we’ve seen over the past 12 months impacts far more than just the prices we pay for goods & services. The IRS uses consumer price inflation (CPI) to determine certain increases to exemptions and deductions for federal tax purposes. While the changes are for 2022 and you won’t be paying the associated taxes until 2023, it’s a good idea to be aware of the new limits. 

Taking the Standard Deduction

The standard deduction underwent a sizable increase back in 2018 due to legislation changes, and many taxpayers now opt not to itemize. For 2022, this choice becomes even more attractive as the deduction for a married couple filing jointly increased by $800 to $25,900. The standard deduction simplifies tax preparation, but if you have deductible items such as medical expenses, property taxes, mortgage interest, charitable giving, or others (and there are hundreds), you may be passing up tax savings. 

If your total itemized deductions are close to the amount of the standard deduction, there are strategies for charitable giving that can increase your tax deductions in any one year. This can be done without increasing your overall plans for giving. Giving some thought to your deductions as you move through the year can help you keep track of where you want to be. 

Alternative Minimum Tax

The alternative minimum tax was created to limit the amount that high-income taxpayers can lower tax amounts through deductions or credits. It sets a floor on the amount of tax that must be paid. The AMT is particularly relevant if you have been granted incentive stock options (ISOs) as part of your compensation. 

The AMT is adjusted based on the price you pay for the shares (the strike price) and the fair market value when you exercise. Because you can choose when to exercise, you have some flexibility in avoiding or minimizing AMT, but it requires careful planning of your income.

Gift and Estate Tax Exclusions

The annual federal exclusion for gifts was bumped up $1,000 to $16,000 for 2022. For a married couple, this means they can gift $32,000 to any individual without using their lifetime exemption. The lifetime exemption also went up, to $12.06 million per person. 

Other Items of Note

Below are some other increases that we pointed out to HCO clients in our most recent quarterly newsletter:

• The total amount you can contribute to a 401(k) plan is now $61,000, or $67,500 if you are 50 or older. Likewise, SIMPLE plan contribution limits are now $14,000 and $17,000 for those 50-plus. Roth and Traditional IRA thresholds will continue at $6,000 per year or $7,000 for 50-plus. 
• HSA contribution limits are going up slightly, from $7,200 to $7,300 per year. 
• The Social Security wage base rises to $147,000 from $142,800. This means you will have to pay Social Security tax on a little more of your income in 2022. The maximum you can earn before losing benefits is now $51,960, versus $50,520 last year. 
• Medicare Part B premiums for those with more than 10 years of work history will rise from $148.50 per month to $170.10. 

The Takeaway

Increases in deductions and exemptions are one of the few areas that inflation can help investors – but you’ll need to plan ahead to take advantage of some of the increases. There are lot of moving parts to a comprehensive plan that can save you money on taxes, and it’s never too early to get started in making the right moves. 

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The information contained herein is intended to be used for educational purposes only and is not exhaustive.  Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return.  If applicable, historical discussions and/or opinions are not predictive of future events.  The content is presented in good faith and has been drawn from sources believed to be reliable.  The content is not intended to be legal, tax or financial advice.  Please consult a legal, tax or financial professional for information specific to your individual situation.

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