Please note: This article may contain outdated information about RMDs and retirement accounts due to the SECURE Act 2.0, a law governing retirement savings (e.g., the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account will change from 72 to 73 beginning January 1, 2023). For more information about the SECURE Act 2.0, please read this article or speak with your financial consultant. (1222-2NLK)
With the year rapidly coming to a close, it might pay to prepare in advance for Tax Day.
"It's a great time to reassess your tax planning for 2022. An important part of this process is to know the likely tax bracket you'll be in, the limits that could impact you, and the potential deductions available," says Hayden Adams, CPA, CFP®, and director of tax and wealth management at the Schwab Center for Financial Research.
Here are eight things to keep in mind as you prepare to file your 2022 taxes.
1. Income tax brackets shifted a bit
There are still seven tax rates, but the income ranges (tax brackets) for each rate have shifted slightly to account for inflation. For 2022, the following rates and income ranges apply:
Taxable income brackets
||Married couples filing jointly (and qualifying widows or widowers)|
|10%||$0 to $11,000||$0 to $22,000|
|12%||$11,001 to $41,725||$20,001 to $89,450|
|22%||$44,726 to $95,375||$89,451 to $190,750|
|24%||$95,376 to $182,100||$190,751 to $364,200|
|32%||$182,101 to $231,250||$364,201 to $462,500|
|35%||$231,251 to $578,125||$462,501 to $693,750|
|37%||$578,126 or more||$693,751 or more|
2. The standard deduction increased slightly
After an inflation adjustment, the 2022 standard deduction increases to $12,950 for single filers and married couples filing separately and to $19,400 for single heads of household, who are generally unmarried with one or more dependents. For married couples filing jointly, the standard deduction rises to $25,900.
3. Itemized deductions remain mostly the same
For most filers, taking the higher standard deduction is more practical and saves the hassle of keeping track of receipts. But if you have enough tax-deductible expenses, you might benefit from itemizing.
The following rules for itemized deductions haven't changed much for 2022, but they're still worth pointing out.
- State and local taxes: The deduction for state and local income taxes, property taxes, and real estate taxes is capped at $10,000.
- Mortgage interest deduction: The mortgage interest deduction is limited to $750,000 of indebtedness. But people who had $1,000,000 of home mortgage debt before December 16, 2017 will still be able to deduct the interest on that loan.
- Medical expenses: Only medical expenses that exceed 7.5% of adjusted gross income (AGI) can be deducted in 2022.
- Charitable donations: The deductions for charitable donations are not as generous as they were in 2021. In 2022, the annual income tax deduction limits for gifts to public charities1 are 30% of AGI for contributions of non-cash assets—if held for more than one year—and 60% of AGI for contributions of cash.
- Miscellaneous deductions: No miscellaneous itemized deductions are allowed.
4. IRA contribution limits remain the same and 401(k) limits are slightly higher
The traditional IRA and Roth contribution limits in 2022 remain the same as the prior year. Individuals can contribute up to $6,000 to an IRA, and those age 50 and older also qualify to make an additional $1,000 catch-up contribution. If you're able to max out your IRA, consider doing so—you may qualify to deduct some or all of your contribution.
However, the 2022 contribution limits for 401(k) accounts have increased to $20,500. If you're age 50 or older, you qualify to make an additional $6,500 catch-up contribution for this tax year as well.
5. You can save a bit more in your health savings account (HSA)
For 2022, the maximum you can contribute to an HSA is $3,650 for an individual (up $50 from 2021) and $7,300 for a family (up $100). People age 55 and older can contribute an extra $1,000 catch-up contribution.
To be eligible for an HSA, you must be enrolled in a high-deductible health plan (which usually has lower premiums as well). Learn more about the benefits of an HSA.
6. The Child Tax Credit is lower after a one-year bump
Tax credits, which reduce the tax you owe dollar for dollar, are normally better than deductions, which reduce how much of your income is subject to tax.
In 2021, the American Rescue Plan Act (ARPA) temporarily enlarged the Child Tax Credit. But in 2022, the credit returns to $2,000 per child age sixteen or younger. The credit is also subject to a phase-out starting at $400,000 for joint filers and $200,000 for single filers. For other qualified dependents, you can claim a $500 credit.
7. The alternative minimum tax (AMT) exemption is higher
Until the AMT exemption enacted by the Tax Cuts and Jobs Act expires in 2025, the AMT will continue to affect mostly households with incomes over $500,000. For 2022, the AMT exemptions are $75,900 for single filers and $118,100 for married taxpayers filing jointly. The phase-out thresholds are $1,079,800 for married taxpayers filing a joint return and $539,900 for all other taxpayers. (Once your income for the AMT hits the phase-out threshold, your AMT exemption begins to phase out at 25 cents for every dollar over the threshold.)
8. The estate tax exemption is even higher
The estate and gift tax exemption, which is indexed to inflation, rises to $12.06 million for 2022. But the now-higher exemption is set to expire at the end of 2025, meaning it could be essentially cut in half at that time if Congress doesn't act.
The annual gift exclusion, which allows you to give money to your loved ones each year without incurring any tax liability or using up any of your lifetime estate and gift tax exemption, increases to $16,000 per recipient (up $1,000 from 2021).
Don't get caught off guard
If you're age 72 or older, make sure you've taken your required minimum distribution (RMD) from your retirement accounts before the end of the year or else you face a 50% penalty on any undistributed funds (unless it's your first RMD, in which case you can wait until April 1, 2023).
If you haven't contributed to your retirement accounts already, now is the time. Review your earnings for the year and take advantage of any deductions that can lower your tax bill. Also, keep an eye on Washington for any last-minute tax changes that can affect your return before you file. Tax season will be here before you know it, and it's never too early to start preparing.
1Operating charities, or qualifying public charities, are defined by Internal Revenue Code section 170(b)(1)(A). You can use the Tax Exempt Organization Search tool on IRS.gov to check an organization's eligibility.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, you should consult with a qualified tax advisor, CPA, financial planner, or investment manager.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.1122-2LW7