Are you planning your investment strategy for 2022? You may first want to look at the recently released IRS 2022 contribution limits. Some of the limits have changed while some remain unchanged. We have compiled a list of the important numbers you need from the IRS to plan for the year ahead. These numbers only apply to the money you earn starting January 1, 2022. Invest smarter and make the most of the coming year!
Standard Deduction
The standard deduction is a specific dollar amount that reduces the amount of income you have to pay taxes on. You can either take the standard deduction or itemize it on your tax return but you cannot do both. It is easier to take the standard deduction. However, if your standard deduction is less than your itemized deductions, then you will probably itemize and save money.
- How much is the standard deduction for 2022?
– If your filing status is single or married-filing-separately, it increases to $12,950 from $12,550
– If your filing status is married-filing-jointly, it increases to $25,900 from $21,100
– If your filing status is head of household, it increases to $19,400 from $18,800
| Standard Deduction 2022 | ||
|---|---|---|
| Filing Status | 2021 Tax Year | 2022 Tax Year |
| Single | $12,550 | $12,950 |
| Married, filing jointly | $25,100 | $25,900 |
| Married, filing separately | $12,550 | $12,950 |
| Head of household | $18,800 | $19,400 |
Tax Brackets
There are 7 federal tax brackets for 2022. Your bracket depends on your income and filing status. The limits of each tax bracket increased by about 3% in 2022.
- How can I get into a lower tax bracket and reduce my taxes?
The two common ways to reduce your taxes are credits and deductions. Tax credits will reduce the amount of tax you owe but they won’t reduce your overall tax bracket. Tax deductions reduce how much of your income is subject to federal taxes. Make sure that you take all of the deductions you can to try to reduce your tax bracket.
401(k) Plan Contribution Limits 2022
– The government has increased the employee contribution for 401(k) plans from $19,500 to $20,500.
– The $20,500 limit also applies to 403b, thrift savings plans, and most 457 plans.
– The catchup contribution limit (only available at the beginning of the year you turn 50) remains $6,500.
– The overall plan limit increases to $61,000. This is the employee contribution + employer contribution + catch-up contribution.
| 401(k) Plan Contribution Limits 2022 | |||
|---|---|---|---|
| Defined Contribution Limit | 2021 | 2022 | Change |
| Maximum employee elective deferral (age 49 or younger) | $19,500 | $20,500 | + $1,000 |
| Employee catch-up contribution (age 50 or older by year-end) | $6,500 | $6,500 | No change |
| Maximum employee elective deferral plus catch-up contribution (age 50 or older) | $26,000 | $27,000 | + $1,000 |
| Defined contribution maximum limit, employee + employer (age 49 or younger) | $58,000 | $61,000 | + $3,000 |
| Defined contribution maximum limit (age 50 or older), all sources + catch-up | $64,500 | $67,500 | + $3,000 |
Traditional IRA and Roth IRA Contribution Limits 2022
– The traditional IRA and Roth IRA contribution limits remain at $6,000, and $7,000 if you are aged 50 and older. These contribution limits have remained the same since 2019.
– You can only contribute earned income to IRAs.
– You can contribute to a traditional IRA regardless of how much you earn but you are not eligible to contribute to a Roth IRA if you earn too much money.
– The income limits to make or deduct these contributions for Roth IRAs are changing for 2022. This means that more Americans will now qualify for Roth IRA contributions.
– You cannot deduct contributions to a Roth IRA but may be able to fully or partially deduct contributions to a traditional IRA. To find out more about traditional IRA deductions, visit the IRS website.
| Amount of Roth IRA Contributions You Can Make in 2022 | ||
|---|---|---|
| If your filing status is... | And your modified AGI is... | Then you can contribute... |
| married filing jointly or qualifying widow(er) | < $204,000 | up to the limit |
| married filing jointly or qualifying widow(er) | > $204,000 but < $214,000 | a reduced amount |
| married filing jointly or qualifying widow(er) | > $214,000 | zero |
| married filing separately and you lived with your spouse at any time during the year | < $10,000 | a reduced amount |
| married filing separately and you lived with your spouse at any time during the year | > $10,000 | zero |
| single, head of household, or married filing separately and you did not live with your spouse at any time during the year | < $129,000 | up to the limit |
| single, head of household, or married filing separately and you did not live with your spouse at any time during the year | > $129,000 but < $144,000 | a reduced amount |
| single, head of household, or married filing separately and you did not live with your spouse at any time during the year | > $144,000 | zero |
SIMPLE IRA Contribution Limit
- The limit for individuals to contribute to their SIMPLE IRA has increased from $13,500 in 2021 to $14,000 in 2022.
- The catch up contribution limit for ages 50 and up is $3,000 for 2022. This has not changed from 2021. The total contribution limit if you are 50 or older is $17,000 for 2022.
Estate and Gift Tax Exemption
- The estate tax exemption increases to $12.06 million per individual and $24.12 million for a married couple.
- The annual gift tax exclusion will increase from $15,000 in 2021 to $16,000 in 2022. You can give $16,000 to as many people as you like without it having an impact on your eventual estate tax.
Social Security
- The cost of living adjustment (COLA) will increase by 5.9% in 2022.
- The maximum monthly payment amount for those that have reached full retirement age will increase to $3,345 from $3,148. This is an increase of $197 per month in 2022.
- The maximum amount of earnings that are subject to the Social Security tax will increase to $147,000. This limit is applied to each person individually. Your marital status, deductions and/or your spouse’s income doesn’t matter.
Build Back Better Bill
The Build Back Better Bill is still under consideration. We previously wrote about legislation to eliminate the backdoor Roth that the House passed but the Senate has not moved on yet. We will continue to keep you updated as this may also impact your financial strategy for 2022.
Maximize Your Money in 2022
A new year calls for a new opportunity to take a look at your current investment strategy. If you want to maximize your money in 2022, schedule a free discovery call with one of our fiduciary financial advisors today!
For more information about the 2022 IRS Limits, please refer to IRS Notice 2021-61 and IRS Notice 2021-45.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.
