Tax code

How Changes to the 2022 Tax Code May Affect Financial Advisor Clients | Financial advisers


At this time of year, as financial advisors review the past 12 months with their clients, they also anticipate tax changes that could impact plans.

For 2022, advisers are revising their plans to account for higher tax brackets and an increased standard deduction, among other changes.

Here are some details about the tax changes that advisors identify as important to their clients.

Tax brackets

With inflation emerging, income caps in all tax brackets will be adjusted in 2022, for taxes filed in 2023.

There will be seven federal income tax rates, ranging from 10% to 37%, starting next year. The top marginal tax rate of 37% applies to people with taxable income greater than $ 539,900 for single filers and $ 647,850 for married couples filing jointly.

These higher brackets are designed to provide relief to Americans who find themselves spending more as inflation has pushed up the cost of living. While this may give the impression that Congress and the IRS are showing sympathy for taxpayers, it’s actually part of an automatic tax bracket adjustment for inflation.

In addition to the adjustment, the standard deductions for tax filers will increase next year. For single taxpayers, the 2022 deduction is $ 12,950, an increase of $ 400. For married couples filing jointly, this makes $ 800 to $ 25,900.

“The high rate of inflation everyone has experienced over the past year has really hurt budgets and reduced cash flow, but tax changes to 2022 are expected to help a lot of middle class people Says Ron Tallou, founder and owner of Tallou Financial Services in Troy, Michigan.

Michael Fischer, director and wealth advisor at Round Table Wealth Management in Westfield, New Jersey, says he expects a tax reform bill to pass Congress at some point in 2022.

“But we also had a similar expectation for 2021 after the second round of elections in Georgia in January,” he adds.

If the legislation is passed, Fischer expects higher marginal rates for top earners and possibly a reinstatement of the 39.6% bracket that was in place until 2017.

“We also expect corporate rates to increase slightly, from the current 21% to maybe 26.5% or 28%, which has both been suggested,” Fischer said.

Roth conversions

“My biggest tax concern is not knowing what will happen with the Build Back Better bill, especially with regard to Roth conversions,” says Tricia Rosen, director of Access Financial Planning in Andover, Massachusetts.

Build Back Better is legislation proposed by President Joe Biden. It includes funds for infrastructure, social service programs and other initiatives, such as climate change.

“Roth conversions are an integral part of many people’s retirement strategies, so they could potentially have a significant impact,” she adds.

Congress would likely only end Roth conversions for the very high earners, those with incomes of $ 400,000 or more as individuals or $ 450,000 as a couple, by 2032. As many financial advisers work with “mass” customers, stopping Roth conversions is unlikely to disrupt many plans.

Steve Wittenberg, director of wealth planning at SEI in Oaks, Pa., Has followed the proposed tax changes to provide information to his company’s clients.

“Even with these changes, Roth conversions remain very attractive,” he says.

Cindy Turoski, managing partner at Bonadio Wealth Advisors in Albany, New York, says her firm encourages clients who make Roth backdoor conversions for this year to act by December 31, rather than wait until April 15. Converting earlier can give account owners more time to pay taxes, which are not due until tax day the following year. In other words, taxes for a Roth conversion in December 2021 would not be due until April 2023.

She also urges clients with after-tax money in a 401 (k) plan that also offers a Roth account to convert that balance to the Roth account by the end of the year. In this way, she says, “the future income on that money can grow tax-free.”

Contribution limits

In 2022, the IRS will allow savers to contribute an additional $ 1,000 per year to a qualifying account such as a 401 (k), 403 (b), or 457 account. This means employees can contribute up to 20,500 $ next year. The increases are intended to take into account a rise in inflation in 2021.

The catch-up contribution limit for people aged 50 and over remains at $ 6,500. This means that workers over 50 can defer income tax up to $ 27,000 under their eligible employer-sponsored plans.

Further, says Turoski, “the limit on total employer and employee contributions to these plans has been increased from $ 58,000 to $ 61,000, so more can be allocated to these plans.”

David Anderson, co-owner and managing partner of Moneywise in Bakersfield, Calif., Emphasizes the need for retirement savers to keep up with these changes.

“One of the most important things an investor can do for the future is to make sure that their contributions to their retirement accounts increase over time,” he says, adding that “it is up to the investor. investor to make these changes to their Accounts. “

Donation tax

“One major change we focused on is increasing the estate exemption for inflation,” Wittenberg said.

It refers to an area of ​​the tax code that affects wealthy Americans, which is raised to $ 12.06 million from $ 11.7 million per individual for 2022. A married couple can now protect a total of 24.12 millions of dollars in federal inheritance or gift taxes.

Lisa Featherngill, national director of wealth planning in the Dallas office of Comerica Bank, notes that the increase in the exemption means “almost $ 300,000 in additional assets that a person can dispose of during their lifetime or in their lifetime. death without incurring a 40% transfer tax.

Wittenberg also points to the increase in the annual gift tax exclusion, which will be $ 16,000 per person in 2022, after four years of holding at $ 15,000. He predicts that these changes will trigger new donation initiatives.

“As the estate exemption is increased for inflation in 2022, the current law will end in 2025, which means it is time to use the exemption now before it is halved,” did he declare.