At HCM, we strive to keep clients up to date with changes that affect their finances. With the constant flow of headlines and new information surrounding Covid-19, the invasion of Ukraine, and monetary policy changes, it is often challenging to identify what information applies directly to your personal situation. The IRS makes several changes to the tax code each year, and we wanted to highlight the key changes for the 2022 calendar year and how they may impact your financial picture:
Qualified plan contributions:
- For 401(k), 403(b), 457, and SARSEP retirement plans, the 2022 contribution limit has increased to $20,500. That represents a $1,000 increase from last year’s limit of $19,500.
- The “catch-up” contribution remains unchanged at $6,500, meaning those aged 50 and over can add that contribution to the limit above and contribute up to $27,000 into their retirement plans for the year.
- Notably, these limits are aggregate, applying to both pre-tax and after-tax (Roth) contributions.
- These limits are not to be confused with the contribution limits for Individual Retirement Account (IRA) contributions, which remain unchanged at $6,000 for those under 50 years of age and $7,000 for those 50 and older.
- Why it matters: If you are able to maximize your retirement plan contributions without compromising your lifestyle, it is advantageous to do so. Check with your HR to make sure that your elective deferral amounts are set on a path to maximize your savings into your employer plan. At minimum, contributions should be made to take advantage of any employer match.
Required minimum distributions:
- The IRS updated their Uniform Lifetime Table, which determines the life expectancy factors used when calculating required minimum distributions (RMDs). These changes apply to distributions for 2022 on. The new table can be found on page 2 of the attached infographic.
- Why it matters: The updated tables reflect a trend toward greater longevity, as the new smaller distribution requirements mean that distributions be withdrawn over a longer time period. This helps reduce the risk of running out of retirement assets if an individual lives past their life expectancy. The smaller distributions also may help reduce annual tax burdens.
Annual gift tax exclusion amount and Estate tax exemption:
- Annual gift tax exclusion:
- The annual federal gift tax exclusion allows an individual to give up to $16,000 ($32,000 for couples) to as many people as you wish (family, friends, etc.) without those gifts counting against your lifetime estate exemption. That represents a $1,000 increase from last year’s limit of $15,000.
- This limit also applies to 529 plan contributions as the annual amount an individual or couple can contribute to an education savings plan.
- Why it matters: This area can be confusing for people, as there is the common misconception that there will be taxes taken out of gifts that exceed the annual exclusion limit. That is not the case. Rather, gifts that exceed the annual exclusion limit merely require you to file a gift tax return (Form 709). The IRS then tracks the gifts made in excess of the annual exclusion amount in order to calculate your estate tax exemption at the end of your lifetime, which is discussed below.
- Estate tax exemption:
- The estate tax exemption has increased to $12,060,000 for individuals, or $24,120,000 for married couples. These numbers represent the value of a person, or couple’s, estate that is exempt from being taxed by the federal government.
- Tying the annual gift tax exclusion and estate tax exemption together: Gifts that exceed the annual gift tax exclusion will reduce your estate tax exemption proportionately. That means your threshold for having to pay estate tax will be lower, but it doesn’t mean that you will have to pay tax on the gifts.
- Why it matters: The estate tax exemption was drastically increased by the Tax Cuts and Jobs Act of 2017, which is scheduled to sunset in 2025. There is constant discussion in Washington about reducing the exemption closer to its pre-TCJA level, and a proposal was included in the Build Back Better Act to reduce the exemption to $5M per person. What ensues from here remains to be seen.
- The standard deduction for single taxpayers has increased to $12,950 ($25,900 for those married, filing jointly).
- Why it matters: An estimated 90% of American taxpayers opt for the standard deduction when filing taxes each year. The $10,000 cap on deductions for state and local taxes, commonly referred to as the SALT deduction, keeps those torn between itemizing and taking the standard deduction sticking with the latter. Removing the SALT cap is another piece of legislation that is frequently discussed on Capitol Hill.
We have included our 2022 Key Financial Data infographic, which lists all the key changes we cited above and is an excellent reference to have handy throughout the year. The infographic can be found and downloaded at the top of this webpage.
This document is provided for informational purposes only; you should not construe any such information as personal legal, tax, investment, financial, or other advice. All information is of a general nature only and does not address the circumstances of any particular individual. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information contained herein before making any decisions based on such information. There are risks associated with investing in securities. Investing in securities, including but not limited to stocks, bonds, mutual funds, and money market funds involves a risk of loss. Loss of your principal investment is possible. The past investment performance of either HCM or any individual security is not a guarantee or predictor of future investment performance. There is no guarantee any individual investor or his or her investment advisor will achieve a particular investment objective.