Taxes FAQ 2022
As April 15 looms on the calendar, stress levels rise as people gather all the necessary paperwork to file taxes for themselves or small businesses. Each year also brings a few new wrinkles in the tax laws, so we want to help reduce the anxiety and worry of filing taxes by answering several frequent questions and providing numbers for 2022 tax guidelines and a resource plan for this year's taxes. Most of the information we presented here is self-explanatory. However, we want to point out a few items in areas of the tax laws that can be confusing. Please note this information is not intended to be tax advice, you should consult your CPA or tax professional for specific tax advice.
For 2022, there were a few more minor changes to the tax laws and codes, but not the significant tax changes enacted in the Tax Cuts and Jobs Act (TCJA) passed in late 2017. The law kept the old structure of seven individual income tax brackets, but it lowered the rates in most cases. The top rate fell from 39.6% to 37%, while the 33% bracket declined to 32%. The 28% bracket dropped to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remained at 10%, and the 35% bracket didn't change. The income bands corresponding to the new rates were also lowered, compared to the 2018 brackets, for the five highest brackets. This year, the income brackets were adjusted slightly for inflation, but just the income ranges in each bracket.
Charitable Donations For 2022, the charitable donation deduction increased. On the 2020 tax return, a temporary provision of the CARES Act permitted up to a $300 deduction per tax year for charitable giving, even for filers who didn’t itemize. For the 2021 tax return, the benefit has now been bumped up to $300 per person. As a result, if you are married and filing jointly, you may be eligible for up to a $600 deduction to charity.
No Taxes Owed on Forgiven Student Loans Students who had all or some of their student loans forgiven in 2021 are not subject to taxation on the forgiven amount. Before the American Rescue Plan was signed into law in 2021, forgiven student loan balances were added to annual income and taxed. The law stops forgiven post-secondary education loans from being taxed until 2025.
The Child Tax Credit Was Expanded The American Rescue Plan increased the amount families could claim in 2021 to $3,600 per child under age six and from $3,000 for children age six and older (the credit was previously $2,000 for children 16 and younger). The credit is also now fully refundable, so the amount is refunded to the taxpayer regardless of the taxpayer’s liability.
Social Security taxes The Social security wage limit is straightforward; any earned income above $147,000 is not subject to social security tax (6.2% for the employee and the same amount for the employer). However, it’s still subject to Medicare taxes (1.45%), which rises another 0.9% for income of $200,000 for an individual and $250,000 for joint filers.
Long-term Capital Gains and Dividends Because most people are in the $83,351 to $517,200 joint income bracket, most people assume that gains for securities held for more than a year are taxed at the 15% Federal rate. But here is the trick: if your income is below the taxable income rate (which is adjusted gross income) in a year, you can clear your gains with no capital gains taxes (up to the income limit). So, it’s wise to look at your highly appreciated stocks more closely in years when your income is below these limits. Just remember your capital gains PLUS your adjusted gross income needs to be below the threshold level for the lower capital gains rate.
Tax-deductible Medical Expenses Increased Congress changed the allowance for deducting medical expenses. Taxpayers can now deduct medical expenses that are greater than 7.5% of adjusted gross income (AGI). For example, if a taxpayer earns $50,000 per year, they can deduct qualifying medical expenses greater than $3,750 for the 2021 tax year.
Real Estate and Gift Tax Limits The annual inflation adjustment for federal gift, estate, and generation-skipping tax exemption increased from $11.7 million in 2021 to $12,060,000 in 2022. As a result, a person can gift or pass on in the form of inheritance up to a total of this amount without it being subject to estate taxes. For a couple, the amount can be doubled.
The generation-skipping exemption is a separate limit and pertains to grandchildren, outright or in a trust, and to certain other individuals who are 37.5 years old or younger. Even if your estate is exempt from federal tax, you or your heirs may be subject to state estate tax. Exemptions for state estate taxes are often lower than the federal estate tax exemption. In addition, some states charge heirs an estate tax.
In addition to the lifetime estate exemption, a person can also gift $16,000 to another individual without paying gift taxes. The keyword "in addition" means that this annual exemption doesn't count towards the lifetime exemption. The annual exclusion is per person, and per year, so a couple can double this amount and apply it towards each of their children. For instance, Jane and John can gift a total of $32,000 in 2022 to each of their two children, $64,000, without paying gift taxes and without lowering their lifetime exemption. An important note: This amount also applies to 529 (college savings plans) contribution limit calculations.
We hope you will find this article useful for your 2022 tax planning and please feel to reach out with questions and comments.