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Financial Planning Updates for 2022

February 22, 2022

The IRS and the Social Security Administration have released several changes for this year that you may want to consider as you plan for the year ahead. Here are some of the highlights.

Income Tax

The deadline to file your individual tax return or request an extension is now April 18th.

You can find the newly adjusted tax brackets and standard deduction amounts here – https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022.

Retirement Planning

Employee contribution maximums to employer-sponsored or small business plans (401(k)s, 403(b)s, etc.) have increased by $1,000, now $20,500, or $27,000 for those age 50+. IRA maximums remain unchanged at $6,000, or $7,000 for those age 50+. If you haven’t already, don’t forget to make your 2021 IRA contribution by the tax filing deadline for this year.

The IRS recently changed the unified and single lifetime expectancy tables, which have been held static for the last twenty years. We use these tables to calculate the minimum distributions required from pre-tax retirement plan balances (RMDs). This is good news for those committed savers and investors who have carefully grown their tax deferred retirement portfolios. Longer expected lifetimes allow for greater stretching of these distributions, meaning lower annual RMDs and improved tax efficiency. If you reached RMD age or inherited an IRA after December 31st, 2019, you don’t need to worry about these changes. You aren’t subject to RMDs, but rather have until the end of the 10th year to remove the balance of your account.

Gifts and Estates

You can gift an additional $1,000 per recipient tax free this year, and now the annual gift tax exclusion is $16,000. Taking advantage of this exclusion is an excellent way to chip away at your taxable estate and transfer wealth over your lifetime. If you are interested in front-loading a 529 plan, where gifts in year one are considered split evenly over a five year period, you could gift $80,000 this year (per donor) to a beneficiary.

Lifetime exclusions for gifts and estates have increased from $11.7 million in 2021 to $12.06 million per person in 2022. The current tax law in effect (Tax Cut and Jobs Act) sunsets after 2025, which means the exemption amount will drop back down to the prior law’s $5 million cap plus inflation.

Medicare and Social Security

Unfortunately for us all, inflation has proved very stubborn. The good news is that it has pushed the average Social Security benefits up by 5.9% for the year, the biggest increase in thirty years. The bad news is that it has also pushed up premiums for all parts of Medicare coverage. Increases in the cost of care and utilization of hospitals as well as outpatient care services have resulted in the highest increase of Medicare part B premiums ever – up by 14.5 percent.

These are very broad updates. As always, if you would like to explore any of these topics in greater detail, we would love to help!

Whitney Butler