Wednesday, May 18, 2022

Ten Tax Planning Tips for 2022

Now that 2021 income tax season has been over for a month and the dust has settled, it is time to start some serious tax planning for 2022. Planning now provides seven months to take action and/or implement changes to avoid a stressful “tax scramble” at the end of the year. In an earlier blog post, I described 12 tax planning topics for 2022.


In this post, I continue the conversation with ten tax planning tips for 2022 (in no particular order) for readers to consider:

¨    Plan for Tax Benefits That Go Away- On a recent webinar, I heard stories about dramatic increases in 2021 tax refunds for families with children resulting from the expanded child tax credit and child and dependent care credit. “Normal” tax rules apply in 2022, however, which may require a withholding change for many families to avoid getting a smaller refund, or owing tax, in 2023. To do this, file a new W-4 form or make larger estimated payments.


¨    Determine Your 2022 “Safe Harbor”- The safe harbor rule is an “income tax get-out-of-jail-free card” to avoid an IRS under-withholding tax penalty. It works like this: withhold 100% (110% with an adjusted gross income or AGI more than $150,000) of tax owed for the previous year (i.e., 2021) or 90% of current year (2022) tax liability using a W-4 form at work for job-related income tax withholding; withholding for Social Security, a pension, and required minimum distributions through account custodians; and/or quarterly estimated payments using IRS Form 1040-ES.

¨    Improve Your Tax Records- If disorganized records were a problem for 2021 taxes due in 2022, set up a better system. Since there is no longer a non-itemizer’s charitable deduction in 2022 and only about 10% of tax filers itemize, you’ll probably have fewer receipts to save. Common filing methods include file folders, a large envelope, and a designated desk drawer. To err on the side of caution in the event of an audit, experts advise keeping tax records for at least six years.


¨    Set Up Spreadsheets- Taxpayers with recurring income and/or expenses (freelancers, landlords, Airbnb and VRBO hosts, employees with side hustles, etc.) should consider purchasing software or setting up a simple Excel spreadsheet to aggregate their business income and expenses throughout the year.


¨    Ramp Up Retirement Savings- Consider increasing retirement savings in a tax-deferred employer retirement savings plan (e.g., 401(k), 403(b), and traditional IRA). Saving even 1% more of pay can make a difference in later life. There are online calculators like this one than can show you what you could save. Also consider some savings in taxable and/or tax-free accounts so you have tax diversification (i.e., assets that are taxed in different ways).


¨    Beware Roth IRAs- There’s nothing wrong with Roth IRAs. They are a great retirement savings tool. However, if your 2022 income could be close to the limits to make contributions ($144,000 for individuals and $214,000 for couples filing jointly in 2022), it may be best to wait until early 2023 when your actual income is known. Otherwise, you may need to do an excess contributions withdrawal and pay tax on any money that an early contribution earned.


¨    Consider a SEP- With millions of Americans quitting jobs during the last year and many becoming part-time freelancers or full-time entrepreneurs, a simplified employee pension (SEP) can be a great retirement savings option. Depending on business income, SEPs often have higher contribution limits than IRAs. The deadline for making 2022 SEP contributions is the tax filing deadline in April 2023. Take time now to research potential account custodians.


¨    Plan for IRMAA- Older adults on Medicare should project their 2022 income as best they can, although it is difficult to know now what taxable mutual fund distributions or self-employment earnings might be. If income appears to be on track to trigger an income-related monthly adjusted amount (IRMAA) Medicare surcharge, it may be wise not to aggravate the situation with taxable capital gains and Roth IRA conversions. Seek professional advice, if needed.


¨    Determine “Bunching” Potential- Bunching is a legal tax minimization strategy where taxpayers aggregate sufficient tax-deductible items to exceed the standard deduction for their age and tax filing status. The 2022 standard deduction is $12,950 for individuals ($14,700 age 65+) and $25,900 for married filing jointly ($28,700 if both spouses are age 65+). An example of a bunching strategy is combining three deductible items: state income and local property taxes up to the $10,000 cap; unreimbursed medical expenses for an elective procedure, and charitable donations.


¨    Tax-Saving Actions- Now is the time to do research, seek professional advice, and determine “process steps” for strategies to reduce your taxes in 2022 or beyond. Five examples are tax-loss harvesting, Roth IRA conversions, qualified charitable contributions (age 70½ +), setting up a donor advised fund, and increased contributions to a tax-deferred retirement savings plan, health savings account or HSA (if eligible), or flexible spending account or FSA (if available).

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.



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