Despite ongoing debate on tax legislation in Congress, the current tax code has many changes that take effect in 2022. Historically, Congress allows for increases in deductible contributions and gifting to reflect the typical impact caused by inflation. It is easy to overlook these changes as an individual who isn’t looking at the tax code on a daily basis. Overlooking these increases can be a lost opportunity in the long run when it comes to tax savings. The beginning of 2022 brought with it several increases that individuals should review as part of their financial plan.
Depending on your employment and benefits offered, there are several types of retirement accounts available to you:
- 401(k) and 403(b) Employee Contributions – INCREASED from $19,500 to $20,500 per year
- 401(k) and 403(b) Employee Catch-up Contributions (age 50 and older – REMAINS at $6,500 per year
- 401(k) and 403(b) Maximum Contributions (Employee and Employer) < age 50 – INCREASED from $58,000 to $61,000 per year
- 401(k) and 403(b) Maximum Contributions (Employee + Employer) age 50 and up– INCREASED from $64,500 to $67,500 per year
- SEP IRA Contributions – INCREASED from $58,000 to $61,000 per year
- SIMPLE IRA / 401(k) Contributions – INCREASED from $13,500 to $14,000 per year
- Traditional and Roth IRA Contributions – REMAINS at $6,000 per year
- Traditional and Roth IRA Contributions Catch-up Contributions (age 50 and older) – REMAINS at $1,000 per year
The income ranges for qualified contributions to Traditional and Roth IRA’s are also increasing for 2022, so it is important to check with your tax advisor to see if you qualify to make a contribution for 2022.
Health Savings Accounts
Often overlooked, Health Savings Accounts or HSAs offer a tax advantaged way to save for future medical expenses. HSAs are only available to participants in High Deductible Health Plans. Funds not used in the HSA account each year can grow tax deferred and used tax free for qualified medical expenses in the future. For 2022 HSA plans saw increases in their contribution limits:
- Single HSA plans – INCREASED from $3,600 to $3,650 per year
- Family HSA plans – INCREASED from $7,200 to $7,300 per year
Healthcare Flexible Spending Accounts
Another option offered by many employers is a Flexible Spending Account (FSA) for healthcare expenses. Contributions into an FSA are made with pre-tax dollars and are spent tax free for medical expenses in the current calendar year. Keep in mind that this is a “use it or lose it” benefit. Money committed to an FSA must be used in the same calendar year. For 2022, the contribution limit for Flexible Spending Accounts has INCREASED from $2,750 to $2,850.
Gift tax limits can be broken into two categories: Annual and Lifetime. Annual Gifts are the amount an individual can give to someone who is not their spouse, that does not have to be reported for tax purposes. For 2022, the Annual Gift limit has INCREASED from $15,000 to $16,000 per year. If a married couple is gifting, the limit is doubled for each recipient. This increase also applies to gifts to 529 College Saving Plans.
Any amount gifted over $16,000 per year to an individual must be reported to the IRS against the Lifetime Federal Estate and Gift Tax Exemption. The Lifetime Gift Tax Exemption has INCREASED from $11,700,000 to $12,060,000 for 2022. This means that individuals who have previously met their lifetime gifting limits can now gift an additional $360,000 from their estate in 2022. Portability rules are still in place for 2022. In the unfortunate situation that a spouse passes away, the surviving spouse can still file to preserve the deceased spouse’s Lifetime Estate & Gift Tax Exemption to add the surviving spouse’s Lifetime Federal Estate and Gift Tax Exemption.
Review Your Elections Now
If you are considering increasing the amount of money set you set aside in a tax advantage plan, it would be wise to do so early in the year. Increasing savings early in the year lowers the monthly impact, as opposed to absorbing the increase at a later date. The window for changing contributions to a Flexible Spending Account likely closed during the benefits election period last year. Gifting is not tied to a paycheck, so increases can be applied when the decision is made to make a gift.