Tax Law Changes That Could Affect Retirees in 2022

With the “Build Back Better” Act still sitting in the Senate, taxpayers await the fate of some significant tax changes for 2022. 

While nothing is more certain in life than death and taxes (thanks Ben Franklin for that witticism), tax law changes can throw a wrench in your financial plan—especially when you don’t see them coming.

The good news is, we can forecast what changes the new year may bring and how they may affect our clients. As everyone prepares for a busy tax season ahead, it’s never too early to start thinking about the 2022 tax year. 

Considering these potential changes now gives you and your financial plan time to adjust and prepare accordingly.

What Tax Law Changes Are Coming?

Below is a quick compilation of proposed tax changes for 2022.

Tax Brackets

Current tax bracket rates remain the same for now, though some policymakers have pushed for adjustments to the top bracket. Most income thresholds within the tax brackets increased by about 3% for 2022, marking the highest jump in four years. It’s important to note that the IRS didn’t change income tax rates (10, 12, 22, etc.); instead, the income thresholds within those brackets saw a jump due to inflation. 

While subject to change, the current tax brackets for the 2022 tax year are:

  • 10%
    • Single filers: $0 to $10,275
    • Married filing jointly: $0 to $20,550
  • 12% 
    • Single filers: $10,275 to $41,775
    • Married filing jointly: $20,550 to $83,550
  • 22%
    • Single filers: $41,775 to $89,075
    • Married filing jointly: $83,550 to $178,150
  • 24%
    • Single filers: $89,075 to $170,050
    • Married filing jointly: $178,150 to $340,100
  • 32%
    • Single filers: $170,050 to $215,950
    • Married filing jointly: $340,100 to $431,900
  • 35%
    • Single filers: $215,950 to $539,900
    • Married filing jointly: $431,900 to $647,850
  • 37%
    • $539,900 or more
    • Married filing jointly: $647,850 or more

Surcharge

While tax bracket rates remain the same, some High Net Worth families may be subject to a 5% or 8% surcharge in 2022.

New this year, couples with a modified adjusted gross income above $10 million (or $5 million for individual filers) will have a 5% surcharge applied to income earned above that threshold.

For those with a modified adjusted gross income higher than $25 million, an additional 3% surcharge will apply. This would be a total of 8% applied to those with incomes exceeding $25 million.

This surcharge tax is set to go into effect starting Jan. 1, 2022.

Estate & Trusts Surtax

Similar to the surcharge mentioned above, a 5% surtax will start applying to non-grantor trusts that generate income above an AGI of $200,000 per year. An additional 3% surtax (for a total of 8%) would apply to income above $500,000. This change will also go into effect at the start of 2022.

State and Local Tax (SALT) Deductions

Currently, taxpayers who itemize their deductions have a $10,000 limit on expenses relating to SALT property taxes. Starting with the 2021 tax year, that deduction limit raises to $80,000. This rule will apply to each tax year until 2031, at which time the SALT deduction limit will revert to $10,000 unless further legislative action occurs.

Net Investment Income Tax (NIIT)

Proposed changes include expanding the scope of the 3.8% NIIT to include specific income incurred through ordinary trade or business. This expansion would apply to those with income above $400,000 (or $500,000 for married filing jointly). 

Additionally, this expansion would also apply to income taxed at the highest tax rate for trusts and estates. This rule is set to go into effect starting Jan. 1, 2022.

This change is important for business owners of limited partnerships or S-corporations, as these individuals may not have previously been subject to the 3.8% NIIT.

IRA Contributions

Starting this year, taxpayers with more than $10 million total in their retirement accounts (IRAs, Roth IRAs, deferred compensation, defined contribution plans, etc.) by the end of the prior taxable year will not be allowed to make contributions if their annual income is greater than $400,000 (or $450,000 for married filing jointly).

Any additional contributions made for those who fall under these conditions would be subject to an excise tax.

Contribution Limits for 2022

The contribution limit for those who participate in a 401(k), 403(b), 457, or Thrift Savings Plan will increase to $20,500. The catch-up contribution for those 50 and older will remain unchanged at $6,500.2   

Contributions to traditional and Roth IRA accounts will remain the same at $6,000. The IRA catch-up contribution is also unchanged, allowing those 50 and older to contribute an additional $1,000 to their IRA account.  

As a reminder, there are income ceiling caps for those contributing to certain retirement accounts. Those earning more than $144,000 (or $214,000 for married filing jointly) are not eligible to contribute to a Roth IRA account, for example.

Contributing the maximum amount to eligible retirement accounts is a simple yet effective way to reduce your taxable income for the year. If you’re concerned about getting hit in other areas by these proposed tax changes, contributing to your retirement accounts could help offset your potential tax obligations.

How to Manage Tax Law Changes

At Legacy Wealth, we approach financial planning with a tax-minded focus. If you’re concerned about upcoming tax law changes, we can sit down together and discuss how to protect your financial standings. Adjusting your strategy based on potential changes is something we can work on now, so you can avoid unwelcome surprises in the coming year.

As you start preparing for the new year, don’t hesitate to reach out and give us a call. We’re here to help retirees as you grow, manage and protect their wealth.

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How A QCD Can Boost Your Giving and Lower Your Taxes

The pandemic issued a surge in charitable need, efforts, and donations. Given the economic turbulence, many wondered how charities, and the people they serve, would fare. But studies have shown that even in these dark times, giving is on the rise. 

Fidelity Charitable conducted a survey that found most people anticipated giving the same amount as planned, with 25% electing to donate more in the wake of the virus. Charitable giving is a crucial part of many people’s financial lives. Using your money to further causes, organizations, and communities you care about brings more meaning and fulfillment into your life.

Charitable giving also comes with important tax benefits, which can help you lower your taxable income and save money. Employing tax-efficiency into your financial plan is crucial, especially for retirees. 

But, traditionally, to reap the tax benefits of charitable donations, you have to itemize deductions on your taxes. Given the increased standard deduction ($12,400 filing single and $24,800 if married and filing jointly for 2020), that becomes nearly impossible for many families to do. 

But retirees have another option, qualified charitable distributions (QCDs). What are QCDs and how can they impact your giving strategy? Let’s find out. 

What is A QCD?

A QCD allows retirees to donate funds from a traditional IRA to a qualified charity. To initiate a QCD, you must be at least 70 ½, and donations are limited to $100,000 per account holder each year. Here are a few other QCD basics,

  • To obtain the tax deduction, QCDs must have a direct custodian transfer meaning that the money must go directly from your IRA to the charity of your choice. Should you withdraw the money then donate it to charity, it can’t be considered a QCD and you will be responsible for the tax implications of the distribution. 
  • QCDs only apply to qualified 501(c) (3) charities. Donor-advised funds, private foundations, and supporting organizations don’t qualify. 
  • QCDs are reported on a 1099 form, and you don’t have to itemize to use a QCD.
  • You can’t also claim the QCD as a charitable tax deduction.
  • QCDs can be made with many types of IRAs, Inherited, SEP, SIMPLE, and under certain circumstances even a Roth, but the most common is a traditional IRA. 

Many retirees use QCDs to satisfy their required minimum distribution (RMD) obligations for the year, which lowers their taxable income and maximizes their charitable contributions. 

Before we move on, let’s have a quick refresh on a couple of traditional IRA particulars.

  • Withdrawals from a traditional IRA are taxed as ordinary income, which can impact your tax bracket and future tax bill. By donating the money as opposed to withdrawing it, you reduce your taxable income for the year.
  • Traditional IRAs carry required minimum distributions (RMDs), which dictate a set amount of money that must be withdrawn from the account each year. RMDs are calculated by the account balance and life expectancy and must be taken by December 31 each year. Need to determine your RMD? This calculator can help. 

Upon its conception, QCDs allowed retirees to donate all or a portion of their RMDs to charity. This strategy helped lower their adjusted gross income and maximize the gift they were able to make to the charity of their choice. But, provisions in the SECURE Act may change the way people use QCDs. 

How does the SECURE Act factor in?

A hallmark provision of the SECURE Act was raising the age for RMDs from 70 ½ to 72. This change encouraged accelerated retirement savings and allowed for a couple of extra years of compounding investments. 

But it also means that current and new retirees will adjust their use of QCDs, many waiting to start donating until RMDs kick in at 72. It’s also important to note that the CARES Act suspended RMDs for 2020, so some retirees who normally give with QCDs, don’t have to count that gift as an RMD. 

These are the mildest changes retirees need to concern themselves with. What retirees really need to keep in mind are IRA contributions after 70 ½.

Before, once you turned 70 ½, you were unable to contribute to your IRA. But now, anyone who earns an income can contribute. So if you are retired, but still earning income, you can actively contribute to your traditional IRA. How does this change impact QCDs?

The provision only affects people who initiate QCDs and make deductible IRA contributions. The rule states that any contributions made to an IRA after 70 ½ can’t be used for QCDs. While the rule doesn’t change what contributions are deductible, it does change how much a QCD can lower your taxable income. 

Let’s look at an example. Say you donate $10,000 through a QCD and also contribute $5,000 to your traditional IRA. While the charity receives the full $10,000, the tax-free portion of your QCD falls to $5,000, with the remaining amount subject to taxes. This wrinkle in your strategy should be discussed with your financial advisor alongside your tax professional to make sure you are making the most of your contributions.

How Legacy Wealth Can Help

QCDs are an excellent giving vehicle that allows retirees to maximize their donations while also employing key tax advantages. 

We love helping our clients build a charitable giving strategy that aligns with their values, helps them establish a legacy, and furthers their financial plan. 

Your giving might look different this year. Perhaps you can’t donate in the same way or you are looking to give your time and talents by volunteering in your community. No matter what is available to you this year, take the time to decide how you want to further your charitable efforts this season and beyond. 

Ready to revamp your charitable giving strategy? Schedule a 15-minute call with our team today. 

 

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What Is Tax Planning (And Why It Matters)

You can think about tax planning like preparing for a test in school.

Late-night procrastination might lead you to a passing grade, but the best way to secure an A is to take a more active path. You should engage the lesson by participating in class, completing homework assignments, learning from mistakes, and thoughtfully preparing for the big test.

Tax planning is a proactive approach, which seeks to infuse smart and effective tax strategies into your financial plan. When you think about taxes, you likely shrug your shoulders and push the thought to another day, but embracing the power of tax planning can save you thousands of dollars per year and bring more security to your financial life.

Let’s take a closer look at what tax planning means and how we apply it to your plan.

What is tax planning?

Taxes claim to fame is annual filing in April. Most people don’t like to think about their taxes at any other point than that two-week window. But this event isn’t tax planning, it’s tax preparation. 

Tax preparation is the physical process of readying your tax returns for the federal, state, or local level. It’s here that you claim your deductions, find your credits, harvest your losses, and more in hopes that you don’t need to sign a big check to the IRS.

Many families work with a professional to help wade through the complicated tax codes and lower their bills. Tax preparation is an essential process, but it’s not a substitute for comprehensive tax planning. Come April there is little you can do to change your tax situation. By implementing fundamental strategies throughout the year, you will be more prepared for the next tax cycle.

Tax preparation is reactive, but tax planning is proactive. It looks at your unique situation including your income, dependents, investments, purchases, timing, and more to build a financial plan with taxes in mind.

Proper tax planning ensures tax efficiency. It analyzes each piece of your financial plan from a tax perspective and situates them in a tax-efficient manner. Once you start to look, you will be surprised at the role taxes play in your finances. 

Taxes are everywhere

Taxes are an omnipresent aspect of your financial plan. No matter where you look, you will find them. Taxes impact your savings, investments, spending, and general lifestyle. By incorporating tax planning in your financial outlook, you can bring more efficiency to your plan. Let’s take a look at just some areas of your life that are impacted by taxes. 

  • Tax bracket management
    • Reducing income tax.
  • Portfolio assessment
    • Ensuring you have the right mix of investments. Making the most of asset location (evaluating the tax-efficiency of each security and housing it in the right account). Understanding your risk profile, both tolerance, and capacity.
    • Strategic tax-loss harvesting and selling securities that no longer serve you.
  • Retirement contributions and distributions
    • Tracking and managing contributions to 401k, IRA, HSA, and Roth accounts. This process also includes making strategic plans for RMDs and other withdrawals. 
  • Charitable giving
    • Creating a strategy around annual gifts to both give with your heart while also maximizing tax-efficiency.
  • Estate taxes
    • Minimize or eliminate estate taxes.
  • Timely tax strategies

As you can see, taxes are everywhere. You can find them checking out at the grocery store, in your paycheck, within your investment accounts, at your house, and more. Recognizing the connections and building a plan to reduce your taxes can bring more strength to your plan. Let’s take a closer look at a specific example of tax planning. 

Taxes and retirement planning

One of the most notable examples of tax planning is building a retirement plan. Effective tax planning becomes even more critical in retirement, as your income is funneled from multiple sources all with different tax treatments. Here are a few essential ways that tax planning impacts retirees.

  • Manage tax bracket throughout retirement.
  • Identify all income channels and corresponding tax treatments.
  • Coordinate tax-efficient withdrawals.
  • Maintain tax-efficient giving strategies like DAFs, QCDs, and more.
  • Create tax-efficient estate planning techniques like different trust structures.

Tax planning can help your money work harder and last longer, two qualities vital to a successful retirement plan. 

How good tax planning impacts you

Tax planning is an ongoing process, one that shifts and changes as your needs do. Someone who just launched their own business will have different tax needs than a new retiree, for example. Our team of in-house and affiliated CPAs, Wealth Managers, and Attorneys can assist you with comprehensive tax planning at any stage of your life. 

Reducing your tax bill gives you more freedom and flexibility to use your finances to support your goals and dreams. We seek to help our clients build a tax strategy that complements their goals and take advantage of critical planning opportunities. 

Taxes impact every aspect of your financial life. You need a strategy to optimize them to keep your money working for you. Remember, if April is the tax exam, you want to start preparing well in advance to build a plan that helps you ace that test. 

Are you ready to see the difference tax planning can have on your life? Schedule a 15-minute call with our team today. 

 

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How Inherited IRAs Have Changed Due To The SECURE Act

Once lauded as a method for leaving sizable and flexible income to beneficiaries, inherited IRAs have become increasingly more complex after the passing of the SECURE Act. While the bill has implemented many important changes for retirees extending their lifetime savings, this change with inherited IRAs have left many people scrambling to update their estate plans. 

Our goal is to help you craft a meaningful and fulfilling legacy and one way to do that is through your estate plan. If you were relying on an inherited IRA as a big portion of your estate planning strategy, let’s take a closer look at how the rules have changed and other methods to consider.

The new outlook for Inherited IRAs

Prior to the SECURE Act, a beneficiary of an inherited IRA could stretch distributions over the course of their lifetime. This “stretch” provision was particularly helpful with a highly-funded IRA as it allowed the beneficiary to control their tax bill while also accumulating additional funds in the account throughout their lifetime. 

But the “stretch” provision has since been eliminated. The SECURE Act stipulates that beneficiaries must withdraw all of the funds in their inherited IRA by the 10th year after the account owner’s death. There is not a set distribution schedule. You can withdraw the money as often or as little as you like so long as the account is empty within 10 years. 

This rule applies to inherited accounts whose account owner passed away after December 31, 2019. For inherited accounts before this date, the “stretch” provision can still be used. 

Eliminating the “stretch” can present some important tax consequences especially for beneficiaries in their prime earning years. 

With a sizeable inheritance, the tax requirements will now vary drastically if you were able to stretch distributions across your lifetime as opposed to only having a decade to withdraw all of the funds. Since distributions are taxed as ordinary income, it could bump some people into higher tax brackets, increasing their taxable income even more.

If inherited IRAs are a significant portion of your estate plan, be sure to set up a time to talk with your financial advisor and estate planning attorney, as they will be able to help you navigate your unique situation. 

Exceptions to the 10-year rule

As with every rule, there are always numerous exceptions. The 10-year rule is no different as there are a few exceptions. If you are a

  • Spouse. Spouses can treat inherited IRAs as their own and do not have to adhere to the 10-year distribution rule. For a traditional IRA, distributions must begin at 72, but a Roth IRA doesn’t carry this same restriction, giving you more options.
  • Minor. For minor children who inherit an IRA, distributions will need to be made but those distributions are based on a life expectancy. It is important to note that this exception only applies until you reach your “age of majority” which for most states is 18, at which point you will have 10 years to empty the account.
  • A person with a disability. The “stretch” provision will apply to you over your lifetime
  • A person with a chronic illness. You are also able to make use of the “stretch” provision
  • A person not more than 10 years younger than the account owner. You may also stretch your distributions over the course of your lifetime. 

Unique rules for spouses

Selecting the right beneficiaries is an important part of your estate planning journey. When you select beneficiaries for your specific accounts it is important to know how that selection will impact them. Inherited IRAs have a few characteristics that are important to know for different types of beneficiaries. 

When a spouse is the sole beneficiary of an inherited IRA, they are able to take over the account with greater ease and simplicity. In essence, the IRS views this account as belonging to the spouse the whole time. The surviving spouse is able to do this by designating themselves the owner of the inherited account, roll over the funds from the inherited IRA to a pre-existing IRA, or set up a new IRA entirely.

Spouses have the most flexibility in handling an inherited IRA, but things get a little bit more complex for non-spouses or spouses who aren’t the sole beneficiary. 

Non-spouse beneficiaries 

For all other beneficiaries, including spouses who aren’t the sole beneficiary, the IRS stipulates that you must transfer your assets into a new, specifically designated inherited IRA. You are unable to make additional contributions to this type of IRA, only distributions. 

What about a Roth?

If you are the beneficiary of a Roth IRA, you are able to withdraw contributions tax-free. The tax benefits of Roth IRAs still apply to beneficiaries as long as the account has been open for at least 5 years before the account owner passed away. If the account is younger than 5 years, all distributions will be taxed as ordinary income. 

Legacy Wealth can help

Estate planning is an important, emotional, and complex process. Our team at Legacy Wealth is passionate about helping you and your family create an estate plan that is true to who you are but more importantly helps you live your legacy each and every day. 

Inheritances are a wonderful opportunity to continue a legacy and we want to help you make the most of that. If you would like to talk more about how an inherited IRA could impact your estate plan, schedule a 15-minute call with us. We can’t wait to serve you. 

 

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What Is The SECURE Act and How Does It Impact Retirees?

The “Setting Every Community Up for Retirement Enhancement Act” or SECURE Act is now in effect. The Act was signed into law on December 20, 2019, and took effect on January 1, 2020. 

The bipartisan SECURE Act was designed to make integral changes to retirement savings vehicles, including employer-sponsored plans and IRAs in the effort to extend the opportunity for people to contribute to their retirement savings. 

As with any new piece of legislation, there are benefits and drawbacks. Let’s take a look at some of the key points of this law and how it will impact you. 

Updates to IRAs

Individual retirement accounts, IRAs, are an important savings vehicle for many pre-retirees. The SECURE Act has introduced several new rules concerning IRAs, namely the change to required minimum distributions, RMDs. Previously, retirees had to take RMDs in the year that they turned 70 ½, but the Act has increased the age limit to 72, extending the time for retirees to save money. 

The Act has also eliminated the maximum age rule for contributing to IRAs. Once someone turned 70 ½, they were unable to make contributions to IRAs, but now you are able to contribute at any age, offering more freedom and flexibility to your savings plan.

For new parents, the law permits an individual to take a qualified distribution of $5,000 from an IRA or an eligible defined contribution plan free of the 10% early withdrawal penalty. This stipulation applies to both the birth and adoption of a child. 

Another important change to IRAs is the Stretch provision for Inherited IRAs. This popular feature allowed beneficiaries of inherited IRAs to withdraw funds over the course of their lifetime. 

Now, the SECURE Act states that the beneficiary needs to withdraw all of the funds in the account within 10 years, causing big tax implications. There are, of course, exceptions to this new rule. Spousal, disabled, chronically ill, and minor children beneficiaries may qualify to sidestep the 10-year provision. The elimination of “the stretch” may change the way you organize aspects of your estate plan. We would love to speak with you about different ways to prioritize your legacy planning in conjunction with this new provision. 

Updates to 401(k)

The SECURE Act has also taken steps to improve employer 401(k) plans. Now, it is easier for small businesses to offer 401(k) plans to their employees by increasing the cap that allows them to automatically enroll workers in the plan to 15%. There is also a tax credit available for small business owners who do have automatic enrollment. 

The Act has also reduced restrictions on annuity provisions in 401(k) plans, leaving employees with the task to be more vigilant in their retirement planning efforts. These reduced restrictions could present an issue particularly if the annuity provider becomes unable to meet their financial obligations. 

Updates to other accounts

Another interesting feature of the SECURE Act is the ability to use funds in a 529 account to make qualified student loan payments up to $10,000. 

The bottom line

Whenever there are major changes to tax law, it is important to speak with your financial advisor to see how those changes will impact your current financial plan. Your financial wellbeing is of the utmost importance to us here at Legacy Wealth and we want to ensure that your plan continues to work for you. Schedule a 15-minute call with us to learn more about the changes you could make to your retirement savings plan. 

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