The 2021 income tax season will soon be in the history books. With income tax calculations still fresh in our heads, this is a great time to do some tax planning for 2022. Here are 12 tax topics to consider:
Itemized Deductions- Only about 10% of taxpayers can itemize since the Tax Cuts and Jobs Act went into effect in 2018. Absent catastrophic medical bills or a natural disaster declared by the U.S. President, most people can’t itemize without a plan. To itemize deductions in 2022, single taxpayers must have allowable deductions greater than $12,950 and married couples filing jointly must exceed $25,900 ($28,700 for a couple with both spouses age 65+).
Charitable Gifts- Nobody wants to have large medical bills or property losses, income and property taxes are SALT capped at $10,000, and it takes a pricey house with a large mortgage to exceed the standard deduct with deductible interest. This leaves charitable donations as a path to itemizing. Strategies to garner a tax benefit for charitable gifts to qualified charities include “bunching” deductions into one tax year and setting up and funding a donor advised fund.
Changed Income- A change in household income this year- up or down- will affect income taxes. Income changes can result from a number of life events including changing jobs, adding or ending “side hustle” freelance work, adding a spouse to the labor force, retiring, getting married or divorced, having a baby, and more.
Changed Number of Dependents- A change in family size and/or number of allowable dependents also affects income taxes. For example, parents can gain or lose the child tax credit. Changes can occur as a result of adding a child(ren) as a result of birth or adoption and losing eligibility when children “age out.” Specific rules for claiming dependents apply.
Tax Bracket Projections- Once you project 2022 income, you can project your marginal tax bracket and tax rate (the percentage of tax assessed on your last dollar of earnings). In 2022, there are seven tax rates for each filing status (single, married filing jointly, head of household, and married filing separately). Pay particular attention if your projected income is close to a “breakpoint” for the next highest tax bracket so you can take proactive steps to stay below that number.
Tax-Deferred Investing- One way to avoid a higher tax bracket is to increase tax-deductible contributions to an employer retirement plan (e.g., 401(k), 403(b), 457, TSP). Contributions are subtracted from gross income, which reduces adjusted gross income (AGI) and taxable income. Sometimes, saving just 1% more of pay can make a big difference on taxes due.
Changed Tax Withholding- If there are major changes in income and number of dependents, tax withholding is likely out of whack. Payroll tax withholding and/or quarterly estimated payments may need to be adjusted. A good resource to synchronize expected income with required tax payments is the IRS Tax Withholding Estimator.
Safe Harbor Rule- A previous year tax return (e.g., 2021 for 2022) is also a useful tax withholding resource because it shows your most recent tax bill. Under the IRS safe harbor rule, if you withhold 100% of tax owed the prior year (110% with adjusted gross income over $150,000), you can avoid an underpayment penalty for insufficient tax withholding. The takeaway, therefore, is to withhold and/or send quarterly payments at least equal to this amount.
Older Adult Tax Concerns- Two key tax planning concerns for older adults are required minimum distributions (RMDs) that increase taxable ordinary income and Income-Related Monthly Adjustment Amount (IRMAA) surcharges on standard Medicare Part B premiums. Often, RMDs trigger IRMAA, which is based on modified AGI or MAGI from two years prior. Taxpayers close to five IRMAA trigger amounts may want to take steps to defer or reduce taxable income.
State Income Tax Check-Up- State tax rules can vary from federal tax rules. For example, you may qualify to deduct medical expenses on a state income tax return while you cannot on a federal return. If so, save those receipts for health insurance premiums and copays. In addition, like federal taxes, make sure that state income tax withholding is on track.
Roth IRA Conversions- Taxpayers concerned about rising tax rates (their own or the government’s) might want to convert money in a traditional IRA to a tax-free Roth IRA before tax rates are set to rise in 2026. Since traditional IRA withdrawals are taxable, consider making small, partial conversions over several years (e.g., 2022, 2023, 2024, and 2025).
Simplify and Organize- The end of tax filing season is a good time to answer the question “Is there a better way to organize my tax records?” Some people use digitized (scanned) records while others use file folders or envelopes. The important thing is to find a system that works for you to make 2022 tax filing season as stress-free as possible in 2023.
This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.