At this time of year, as financial advisors review the past 12 months with clients, they are also considering…
At this time of year, as financial advisors review the past 12 months with clients, they also anticipate tax changes that may impact the plans.
For 2022, advisers are revising the plans to account for higher tax brackets and an increased standard deduction, among other changes.
Here are some details about tax changes advisors consider important to their clients.
With inflation rearing its head, the 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 individuals with taxable income over $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 driven up the cost of living. While it may seem like Congress and the IRS are showing sympathy for taxpayers, it’s actually part of an automatic tax bracket adjustment for inflation.
In addition to adjustment, the standard deductions for registrants will increase next year. For single taxpayers, the 2022 deduction is $12,950, an increase of $400. For married couples filing jointly, this represents an increase of $800 to $25,900.
“The high inflation everyone has been experiencing over the past year has really hurt budgets and tightened cash flow, but the tax changes coming in 2022 should 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 adviser at Round Table Wealth Management in Westfield, New Jersey, says he expects a tax reform bill to pass Congress sometime in 2022.
“But we also had similar expectations for 2021 after Georgia’s runoff election in January,” he adds.
If the legislation is passed, Fischer expects higher marginal rates for high earners and possibly a restoration of the 39.6% band that was in place until 2017.
“We also expect corporate rates to rise slightly from the current 21% to possibly 26.5% or 28%, both of which have been suggested,” Fischer said.
“My biggest tax concern is not knowing what will happen with the Build Back Better bill, especially with regards to Roth conversions,” says Tricia Rosen, director at 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.
A proposal to Congress would end the practice of Roth individual retirement account conversions via backdoor — when an account holder converts a traditional IRA to Roth and pays the required taxes — and imposes new rules on all Roth conversions.
“Roth conversions are such an integral part of many people’s retirement strategies that they could therefore have a significant impact,” she adds.
Congress would likely end Roth conversions only for very high earners, those with incomes of $400,000 or more as individuals or $450,000 as a couple, by 2032. Like many financial advisors work with ‘high net worth’ clients, a halt in Roth conversions isn’t likely to disrupt many plans.
Steve Wittenberg, director of inheritance planning at SEI in Oaks, Pennsylvania, followed the proposed tax changes to provide information to his company’s clients.
“Even with these changes, Roth conversions continue to be very attractive,” he says.
Cindi Turoski, managing partner at Bonadio Wealth Advisors in Albany, New York, said her firm is encouraging clients who perform backdoor Roth conversions this year to act before Dec. 31, rather than waiting until April 15. time to pay the taxes, which are not due until the next year’s tax day. In other words, taxes for a Roth conversion in December 2021 would not be due until April 2023.
She also urges customers 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. That way, she says, “future earnings from that money can grow tax-free.”
In 2022, the IRS will allow retirement savers to contribute an additional $1,000 per year to a qualified account such as a 401(k), 403(b), or 457. This means employees can contribute a maximum of $20,500 next year. The increases are intended to account for 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 in their employer-sponsored qualified plans.
Additionally, says Turoski, “the limit on total employer and employee contributions to these plans has increased from $58,000 to $61,000, so more can go into these plans.”
David Anderson, co-owner and managing partner of Moneywise in Bakersfield, Calif., stresses the need for retirement savers to keep up with these changes.
“One of the most important things an investor can do, going forward, is to make sure that their contributions to their retirement accounts grow over time,” he says, adding that “it’s the investor to make these changes in their Account.”
“A major change we’ve been focusing on is increasing the estate inflation exemption,” Wittenberg said.
It refers to an area of the tax code that affects affluent Americans, which is increased to $12.06 million from $11.7 million per individual for 2022. A married couple can now protect a total of 24.12 million dollars of federal property taxes or gift tax.
Lisa Featherngill, national director of wealth planning at Comerica Bank’s Dallas office, notes that the increased exemption means “nearly $300,000 in additional assets that a person can give away during their lifetime or in his death without incurring a transfer tax of 40%.
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 it at $15,000. He predicts that these changes will trigger new giving initiatives.
“While the estate exemption is being increased for inflation in 2022, the current law will expire in 2025, which means it’s time to use the exemption now before it’s cut in half,” he said.
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How the 2022 tax code changes may affect clients of financial advisers originally appeared on usnews.com
Correction 12/17/21: A previous version of this story misspelled Cindi Turoski’s name.