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How Your Finances May Change In 2022
We detail changes to official federal legislation, proposed legislation, and other financial planning considerations that may impact you and your family in 2022.
By Senior Advisor Andrew Schaetzke, CFP®.
Last fall when the Build Back Better Act was introduced in Congress, we expected taxes could increase significantly for certain families as well as businesses. However, the proposed tax plan has changed often and significantly during congressional negotiations. While the legislation is not yet finalized, if passed in 2022, we do not expect that the Build Back Better tax plan will result in as many big changes as we initially anticipated.
Based on current proposed legislation, the following points summarize the provisions that could impact you and your family:
New federal income tax surcharge on higher earners: Households would have to pay an additional 5% surcharge on modified adjusted gross income (MAGI) above $10 million, as well as an additional 3% on MAGI above $25 million. For earners with greater than $25 million in MAGI, this could result in a top federal tax rate around 45%, which could not be decreased by taking large itemized deductions or the qualified business income deduction.[1]
Expansion of the 3.8% net investment income tax (NIIT) for S corporations and partnerships: The 3.8% net investment income tax on capital gains, taxable interest, dividends, passive rents, annuities, and royalties would be expanded to apply to active business income for pass-through firms.[1]
State and local tax (SALT) deduction for federal income taxes: The cap on the SALT federal income tax deduction would increase from $10,000 to $80,000 starting in 2022 through 2030.[1]
Extension of the enhanced Child Tax Credit (CTC) through 2022: The enhanced child tax credit - $3,600 for each child under age 6, as well as $3,000 for each child ages 6-17 - would extend into 2022 for joint filers with MAGI less than $150,000 ($112,500 for single filers).[1]
Limitations on Individual Retirement Accounts (IRAs) contributions for wealthier households: No longer would allow for contributions to IRAs with balances greater than $10 million. Additionally, IRAs with balances greater than $10 million may have accelerated required minimum distribution (RMD) requirements.[1]
Increased IRS funding: The IRS would receive increased funding for hiring and improving operations, which could lead to more audits for wealthier households.[1]
While the effective date for this legislation is uncertain, we expect the changes could be effective retroactively, as of January 01, 2022.
There have been some other annual cost-of-living and government-controlled changes that may affect you and your family in 2022:
5.9% cost-of-living adjustment for Social Security: For individuals currently or planning to receive Social Security payments in 2022, your benefits will be 5.9% higher than 2021 due to inflation.[2]
Lower required minimum distributions RMDs from Traditional IRAs, Traditional 401(k)s / 403(b)s / 457 plan, and Roth 401(k)s / Roth 403(b)s: If you are required to take an RMD from one of these accounts, your RMD as a percentage of your portfolio will be slightly lower in 2022 due to an increase in life expectancy.[3]
Federal student loan interest payments frozen until May 01, 2022: Due to ongoing effects from the pandemic, the Biden administration extended a freeze on federal student loan interest payments from February 01, 2022 to May 01, 2022.[4]
Changes to retirement plan contribution limits, estate tax exemption, and gift tax exemption: Various limits and exemptions have increased for 2022, primarily resulting from inflation. For example, the maximum employee contribution limit to 401(k)s / 403(b)s / 457 plans is increasing from $19,500 to $20,500. Additionally, the annual gift tax exemption is increasing from $15,000 to $16,000. You can find more information here.
As part of your financial planning process for 2022, there are a few ways that you can implement your plan while potentially lowering your federal income taxes:
Contribute to tax-advantaged investment accounts: Depending on your eligibility, you may be able to contribute to tax-advantaged investment accounts such as 401(k) / 403(b) / 457 retirement plans, IRA, Health Savings Account (HSA), and 529 plans in order to save for specific purposes while also potentially lowering your taxes. Additionally, you have until April 15, 2022 to contribute to your IRA and HSA for 2021 if eligible.
Charitable contributions and donor-advised funds: Because of the rise in many investment markets over the past few years, many people hold taxable investments with large unrealized gains. By directly gifting these taxable investments to eligible charitable organizations or creating a donor-advised fund, you can potentially lower federal income taxes for 2022 while giving to the organizations you want to support.
Tax loss harvesting: Particularly during volatile market periods, tax loss harvesting allows you to sell eligible taxable investments with losses, and use these losses to offset realized taxable capital gains. With tax rates expected to increase for certain taxpayers in 2022, tax loss harvesting could prove increasingly valuable.
As federal legislation evolves, we will continue to update you on any changes that may impact you. Additionally, you can find well-written summaries of the proposed financial changes on the Tax Foundation (taxfoundation.org) website. As always, please feel free to reach out to us if you have any questions or want clarity on how the proposed changes may affect you.
Important Disclosure Information & Sources:
[1] “House Build Back Better Act: Details & Analysis of Tax Provisions in the Budget Reconciliation Bill“. Tax Foundation, 02-Dec-2021, taxfoundation.org.
[2] “Cost-of-Living Adjustment (COLA) Information for 2022“. Social Security, ssa.gov.
[3] “Required Minimum Distribution Calculator“. U.S. Securities and Exchange Commission, investor.gov.
[4] “The White House Will Freeze Federal Student Loan Repayments Until May 1“. Katie Rogers and Tara Siegel Bernard, 22-Dec-2021, nytimes.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Suggested Reading
6 Tax-Saving Strategies For You And Your Portfolio
For taxable investors, the following strategies may help you save money on taxes without lowering your potential investment returns.
By Senior Advisor Andrew Schaetzke, CFP® and Investment Associate Bobby Adusumilli, CFA.
Why do you invest?
Each of us has our own goals for investing. For some, we want to support our families. For others, we want to donate to charitable causes. For business owners, you want to successfully grow your business over time.
If along the way we can legally save on taxes, then all the better. All else equal, lower taxes leave us with more money to achieve our specific goals.
For taxable investors, the following strategies may help you save money on taxes without lowering your potential investment returns. As always, please consult with your tax advisor as well as other advisors before implementing these strategies.
Use Tax-Efficient Investments
Taxes are only one of the criteria that investors consider when designing their portfolios. Yet there are usually multiple investment options to choose from in whatever area you want to invest in. Particularly for mutual fund and ETF investors, when choosing between multiple investment options, the below considerations may help you save money on expected taxes without sacrificing expected return.
Invest in lower turnover mutual funds / ETFs: Because they sell less of their holdings on an annual basis, mutual funds / ETFs with lower turnover typically realize less net capital gains than mutual funds / ETFs with higher turnover, and thus are likely to pay less capital gains distributions each year.[1]
Invest in tax-sensitive mutual funds / ETFs: Some investment managers actively consider tax consequences when making investment decisions, such as selling higher cost basis positions for a particular investment or selling a comparable investment with a higher cost basis. By choosing a tax-sensitive mutual fund / ETF, you may lower your annual capital gains distributions.
Consider ETFs: Because of their structure, ETFs are typically less likely to pay capital gains distributions than similar mutual funds.[2] Therefore, ETFs are becoming an increasingly popular choice for taxable investors.[3] However, particularly for larger investors as well as lower-AUM ETFs, ETFs may not outperform similar tax-sensitive mutual funds after taxes and fees, so it is important to choose the right investment for your specific situation.
Invest Via Tax-Advantaged Accounts
There are three general types of tax-advantaged accounts:
Tax-deferred: Money you contribute to the account is not taxed, but money you withdraw in the future is subject to taxes. Examples include Traditional IRAs, Traditional 401(k)s, Traditional 403(b)s, and 457 plans.
Tax-exempt: Money you contribute to the account is taxed, but money you withdraw in the future is not subject to taxes (subject to specific rules). Examples include Roth IRAs, Roth 401(k)s, Roth 403(b)s, and 529 plans.
Tax-free: Money you contribute as well as withdraw from the account is not subject to taxes, so long as the money is used for specific purposes. While these accounts are rare, a popular tax-free account is a Health Savings Account (HSA).
All of the above tax-advantaged accounts allow investing the balances. Additionally, if you already have a Traditional IRA, Traditional 401(k), or a Traditional 403(b), you may be able to convert some or all of the account balances to a Roth account - known as a Roth conversion.[4]
Depending on your employment, income, and age, you may be able to use some combination of these tax-advantaged accounts to help you save on taxes over time.
Asset Location
If you have a combination of taxable and tax-advantaged accounts, you could invest your most tax-inefficient investments within your tax-advantaged accounts. Once you decide which tax-inefficient investments you want in your tax-advantaged accounts, you could place your highest expected-return investments into your tax-free and tax-exempt accounts, and place your lower expected-return investments in your tax-deferred accounts.
Figuring out how to rank your investments based on tax-efficiency is complicated, and is highly dependent on your income, net worth, and age. For more comprehensive information on asset location, you can check out this webpage.[5]
Tax Loss Harvesting
Within taxable accounts, if you realize a net loss on an investment position, you are able to use that net loss amount to offset any current or future realized capital gains (subject to the wash-sale rule).[6] Additionally, if you have extra net capital losses at the end of the year, you may be able to offset up to $3,000 in federal income for this and potentially future years.[6] However, it’s important to emphasize that tax loss harvesting involves tax deferral, not tax avoidance.
If you want to learn more about tax loss harvesting, you can read our article on harvested losses.
Analyze Your Withdrawal Order
If you have a mix of taxable and tax-advantaged investment accounts, then you are subject to various withdrawal limitations and tax consequences. If you are able to selectively withdraw from each of these accounts over time, you may be able to pay lower your taxes in the short-term while allowing more time for your investments to grow.
Some general rules you can consider for how to generate cash from your investments:
First use the distributions - dividends, interest income, capital gains distributions - from your taxable accounts.
If you are age 72 or older, use the required minimum distributions (RMDs) from your relevant tax-advantaged accounts.
Within taxable accounts, sell positions that are subject to long-term capital gains taxes.
Within the taxable accounts, sell positions with higher cost bases.
Gifting and Charitable Donations
The ultimate goal of saving on taxes is to have money to accomplish our goals. Particularly for those who are inclined to gift money to your family or donate to charitable institutions, the below options may decrease your taxes over time.
For each member of your family, you may gift them up to $15,000 per year, via cash or investments.[8] Particularly if a family member has a lower tax bracket than you, it may be advantageous for you to gift a low cost basis investment, which could help decrease future taxes paid on that holding. For more information, you can read our article on gifting.
From your taxable accounts, you can donate cash or investments directly to a charitable institution. This can help you save on future taxes, up to federal deduction limits.[9]
As long as you are age 72 and meet the specific IRS rules, you can donate up to $100,000 annually directly from your Traditional IRA (without paying taxes) to a qualified charity through a qualified charitable distribution.[10]
Conclusion
While each of the above strategies may help, combining some or all of these strategies could significantly improve your investment portfolio over time, leaving you with more money to accomplish your goals. As always, please consult with your tax advisor as well as other advisors before implementing these strategies. If you have any questions on how you can incorporate the above strategies in your portfolio, feel free to reach out to us.
Important Disclosure Information & Sources:
[1] “Turnover Definition“. Will Kenton, 14-Jul-2020, investopedia.com.
[2] “Do ETFs Generate Capital Gains for Shareholders?“ Andriy Blokhin, 23-Sep-2021, investopedia.com.
[3] “The Future of ETFs“. Irene Huhulea, 23-Aug-2021, investopedia.com.
[4] “Roth IRA Conversion“. Julia Kagan, 23-May-2021, investopedia.com.
[5] “Tax-efficient fund placement“. Bogleheads, bogleheads.org.
[6] “Topic No. 409 Capital Gains and Losses“. IRS, irs.gov.
[7] “6 tax-saving strategies for smart investors“. Jessica McBride, 18-Feb-2021, vanguard.com.
[8] “Frequently Asked Questions on Gift Taxes“. IRS, irs.gov.
[9] “Charitable Contribution Deductions“. IRS, irs.gov.
[10] “IRA FAQs - Distributions (Withdrawals)“. IRS, irs.gov.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Suggested Reading
How To Save More Money
We provide this resource to help you determine ways to save and invest more in tax-efficient ways.
By SJS Investment Services Senior Advisor Andrew Schaetzke, CFP®.
Over the past year, global stock markets have provided some of their best returns in recent history.[1] As a result, many investors have more savings than ever before. Particularly with potential upcoming changes to the U.S. tax code, many investors are asking how can they save and invest more in tax-efficient ways.[2] We provide the below resource to help you determine ways to save and invest more in tax-efficient ways. As always, please consult your tax professional for specific advice.
From this checklist, you may come away with answers to the following:
Do I need to save more in your Emergency Fund? If so, how should I invest my Emergency Fund?
For healthcare savings, how much can I contribute to a Flexible Savings Account (FSA) and / or Health Savings Account (HSA)?
How much can I save in the retirement plan offered by my employer?
If I exceed income limits, how can I invest in Roth accounts?
As a business owner, what additional savings options do I have?
How can I help my children save more for their future (ex. education savings account, trust account, etc.)?
Should I consider an annuity or additional life insurance?
What accounts can I use for tax-efficient charitable giving?
As always, we are here to help you analyze your personal situation and help you plan for your future. Please feel free to reach out to us if you have any questions.
Important Disclosure Information & Sources:
[1] “Benchmark Returns“. Vanguard, 30-Apr-2020, investor.vanguard.com.
[2] “Biden Will Seek Tax Increase on Rich to Fund Child Care and Education“. Jim Tankersley, 22-Apr-2021, nytimes.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide tax advice. Please consult your tax professional for specific advice. This material has been prepared for informational purposes only.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Suggested Reading
How Would President Biden's Tax Plan Impact Your Finances?
President Biden’s administration recently released details of a proposed tax plan. To help you determine how the proposed tax plan may impact your finances, we provide these resources.
By SJS Investment Services Senior Advisor Andrew Schaetzke, CFP®.
As you might have heard, President Biden’s administration recently released details of a new proposed tax plan, to potentially go into effect starting in 2022 pending congressional negotiations and approval.[1] To help you determine how this proposed tax plan may impact your finances, we provide the below resources to help simplify the changes and address your questions. As always, please consult your tax professional for specific advice.
From this checklist you may come away with answers to the following:
How may federal income taxes, Social Security taxes, capital gains taxes, estate taxes, and corporate taxes change?
Will tax deductions for traditional retirement accounts (e.g., 401(k) & IRA) change?
Are there additional tax credits for small business owners?
How will the Child and Dependent Care Tax Credits change?
Will the step-up rule for inherited assets change?
Will first-time homebuyers receive a federal tax credit?
As always, we are here to help you analyze your personal situation and help you plan for your future. Please feel free to reach out to us if you have any questions.
How Might President Biden’s Tax Plan Affect Me?
As A High-Income Taxpayer, How Might President Biden’s Tax Plan Affect Me?
Important Disclosure Information & Sources:
[1] “Biden Will Seek Tax Increase on Rich to Fund Child Care and Education“. Jim Tankersley, 22-Apr-2021, nytimes.com.
Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide tax advice. Please consult your tax professional for specific advice. This material has been prepared for informational purposes only.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Suggested Reading
Thanks IRS, Here We Go Again!
The IRS recently announced a delay to the date for filing and making 2020 federal tax payments, from April 15, 2021 to May 17, 2021. This change applies to individual returns.
By SJS Investment Services Managing Director & Senior Advisor Jennifer Smiljanich, CFP®.
The IRS recently announced a delay to the date for filing and making 2020 federal tax payments, from April 15, 2021 to May 17, 2021.[1] This change applies to individual returns.
While some states have adjusted their tax return filing and payment deadlines to match the new federal dates, each state is making their own decision. To see if your state has delayed its filing deadline, you may check the Federation of Tax Administrators website.
For those of you who make estimated tax payments, payments will be due April 15. As always, please be sure to check in with your tax professional for guidance.
Also of interest, the IRS has extended the deadline to make individual retirement account (IRA and Roth IRA) contributions for tax year 2020 from April 15, 2021 to May 17, 2021.[2] This May 17 deadline also applies for 2020 contributions to health savings accounts (HSAs).[2]
If you have questions, please let us know. We are happy to help!
Important Disclosure Information & Sources:
[1] “Tax Day for individuals extended to May 17: Treasury, IRS extend filing and payment deadline“. IRS, 17-Mar-2021, irs.gov.
[2] “IRS Extends IRA Contributions Deadline”. Melanie Waddell, 29-Mar-2021, thinkadvisor.com.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.