Banking and Financial Services

With Your Return Done, It’s Not Time to Close the Drawer and Forget

Smart Tax Planning for 2022

By Barbara Trombley

 

Most of you have probably just filed your taxes or an extension. Maybe you are shell-shocked by the taxes owed on unexpected capital gains, unemployment, or additional income picked up in the last year. Maybe you received a large refund, which means you are estimating a larger tax bill than is due.

It is not the time to close the drawer and forget. Smart taxpayers start planning right away for next year so that they are prepared for their 2022 taxes and have done all they can to minimize them.

The first task is to have a detailed discussion with your accountant to comprehend why you owed extra taxes this year or why you received a big refund.

If it’s the latter, you are having too much money withheld. If you expect your income to be the same in 2022, you can adjust your withholdings. If you are still working, call your payroll department and make a change. If you are retired, you are probably having taxes withheld from a few different sources — possibly Social Security, a pension, or investment distributions. Getting a big refund is not a good thing. Make a change to one or all so you aren’t giving the government an interest-free loan with your money. Also, do the same for state taxes.

Barbara Trombley

Barbara Trombley

“It is not the time to close the drawer and forget. Smart taxpayers start planning right away for next year so that they are prepared for their 2022 taxes and have done all they can to minimize them.”

If you owed money, have a clear understanding why. Many dual-income families enter a higher tax bracket when combing two salaries. Unless you fill out a new version of the W4, your payroll department may not be withholding enough. Also, in our new economy, many people have picked up side jobs. Unless you make quarterly estimated tax payments, you will have to pay the taxes owed on the additional income when you file. Talk to your accountant about making quarterly estimated tax payments. It is easier to fund a large tax bill over the course of the year instead of scrambling to find the funds. Also, you will avoid potential interest and penalties by having the correct amount of taxes paid throughout the year instead of in a lump sum in April.

Another common reason to have owed money for 2021 taxes was due to capital-gains distributions in non-retirement investment accounts. The stock market had a great year in 2021, and many mutual-fund companies realized gains on holdings. These are tough for the investor to plan for. If you have investment accounts that are not retirement-specific, you will see a 1099-Div form from the investment company each year. Dividends and interest may be predictable, but gains and losses, not so much. Taxable gains mean you were successful and made money in your investment account, and taxes are due.

Do you want to try to reduce your tax bill? Consider maximizing your retirement-plan contribution. In 2022, investors can contribute $20,500 to their 401(k), 403(b), or 457 with an additional $6,500 of catch-up contribution if over age 50. This is a great way to get a tax break (your contributions are deducted from your income before taxes are figured) and grow your assets. You will need to log in to your plan and adjust your withholdings to account for the increase, as the maximum contribution allowed was $19,500 in 2021. Contribution limits are also increasing for Simple IRAs, from $13,500 in 2021 to $14,000 in 2022, with a $3,000 catch-up contribution.

There are some notable changes in the 2022 tax year that may impact how much you will owe when figuring next year’s taxes. On the plus side, the standard deduction will slightly increase for all filing categories. Income thresholds for deduction phaseouts will also increase for traditional IRAs and Roth IRAs. In addition, the federal lifetime estate-tax and gift-tax exemption for 2022 jumped from $11.7 million to $12.06 million — $24.12 million for couples if portability is elected when filing after the death of the first spouse. This is more than enough for most Americans.

Unfortunately, the Massachusetts estate tax is not nearly as generous. If you die as a Massachusetts resident, your heirs may have to pay an estate tax, which is calculated on the first dollar of estates that are over $1 million. Gov. Charlie Baker has current legislation that would exclude the first $2 million in assets when figuring the estate tax. This change is long overdue.

There are many other changes coming this year for taxpayers, and this article highlights just a few. If it impacts you, look up changes to child tax credits, earned-income tax credits, deductions for teachers’ expenses, and changes to the kiddie tax. Knowledge and planning are the keys to having a successful, uneventful 2022 tax season.

 

Barbara Trombley is a financial advisor and CPA with Wilbraham-based Trombley, CPA; (413) 596-6992. Securities offered through LPL Financial. Member FINRA/SIPC. Advisory services offered through Trombley Associates, a registered investment advisor and separate entity from LPL Financial. This material was created for educational and informational purposes only and is not intended as ERISA tax, legal, or investment advice.

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