End of Year Tax Planning: Your 2022 Guide To Saving More
In 2017, U.S. taxpayers experienced the greatest overhaul to the American tax system in decades when then-president Trump signed the Tax Cuts and Jobs Act (TCJA). However you feel about the TCJA, many Americans have enjoyed tax benefits every year since. In 2022, though, everything could change.
President Biden has proposed the Build Back Better Act. If passed into law, this act would make several changes to the current tax structure. Even if Build Back Better, as passed by the House in December, fails to muster sufficient support in the Senate, a similar piece of legislation will likely get voted on and eventually signed.
How can you protect your income from tax restructuring in 2022?
Ways Tax Structures Could Change in 2022
The Build Back Better Act proposes fluid tax changes for taxpayers in both the upper and lower tax brackets. These changes phase in and out at different start dates, and they have different durations.
If you earn more than $400,000 but less than $1 million a year as a household, you will probably see a bump in your taxes. Households earning more than $1 million annually may pay slightly less in taxes.
Lower income earners may see tax decreases due to raising the limits on the child tax credit and the Earned Income Tax Credit.
Households in the middle, those earning in the $50,000 to $75,000 range, or about 16% of Americans, would probably see no change in their taxes.
Of course, all these projections are simply that — projections. We won't know the new regulations until legislation gets passed and executed. Even then, each taxpayer's unique personal situation will determine what they owe.
For now, it's important to maximize the benefits available in 2021.
End of Year Tax Planning
Take advantage of the current tax law before December 31 to minimize your income taxes.
Maximize Your Annual Retirement Contributions.
You can contribute up to $6,000 per year to a traditional or Roth IRA. If you are over 50, you
may also make a one-time catch-up contribution of $1,000. This year, the IRS will allow you to
count retirement contributions made up to April 15, 2022 on your 2021 taxes.
How do I figure the Taxable Amount of an IRA Distribution in 2021?
Perhaps you are already retired and therefore no longer contribute to an IRA. In fact, you're now
making withdrawals from your retirement investments. Here's how your taxes will work:
If all your deposits into a traditional IRA were tax deductible, then all your withdrawals will count
as taxable income. Withdrawals from a Roth IRA will not count as taxable income, however,
provided you are older than 59 ½ and your account has been open for five years or more.
Be Generous in 2021.
A generous person will prosper; whoever refreshes others will be refreshed. Proverbs 11:25
Generosity is good for the soul. If you're a U.S. taxpayer, it's also good for your wallet.
This year, taxpayers who itemize their deductions and make cash donations can claim up to 100% of their adjusted gross income as charitable contributions. Normally, that figure falls between 20% and 60% and there are a few exceptions so check with your tax preparer.
If you've been wanting to make a major gift, this may be the best year to do it from a tax perspective.
Standard Deduction or Itemize? Here's How to Know.
A standard deduction lowers your income by a fixed amount. An itemized deduction adds up a list of eligible expenses. In 2021, the standard deduction limits for those under 65 are as follows:
For single or married filing separately — $12,400
For married filing jointly or qualifying widow(er) — $24,800
For head of household — $18,650
Itemized deductions can be much more — or much less — than the numbers listed above. If you have made major charitable contributions, had a large uninsured casualty, or paid significant out-of-pocket medical expenses, you may want to itemize.
Review your deductions with your wealth manager and tax advisor before you decide.
Should You Defer Income or Not?
If you are a highly compensated employee, you may be offered the chance to defer some of your income until 2022. Companies often provide this perk to retiring c-suite executives. Deferring income can help retiring Americans maximize their savings and reduce their taxes.
For decades, deferred income was a definite perk. Under the TCJA, however, this loophole may not offer many benefits. In fact, you could lose deductions if the new tax structure increases your adjusted gross income next year.
Before you agree to a deferred compensation arrangement, talk to your wealth management expert and your tax preparer.
Cooke Wealth Management is here to answer your questions about navigating the gap between the TCJA and the Build Back Better Act. Call us today for a consultation.