As a successful business owner or high net worth individual, you can attest to the fact that no day is routine — never mind an entire year. But it’s safe to say that these past two years are without precedent. Nothing previously even comes close to them when it comes to uniqueness. Due to COVID-19 and the widespread mitigation measures that followed, supply chains have experienced massive levels of instability and inconsistency, fueled by production slowdowns, heightened demand and unprecedented government stimulus. Families have experienced similar levels of instability and unknowns, whether in school, employment status or work environments.
These events substantiate the universal truth that change really is life’s only constant. And the same can be said for tax updates — every year brings new developments. With tax season upon us, here are some of the adjustments to be mindful about for 2022, so you have a full year in which to plan:
- Tax brackets have expanded
As a high net worth individual, you know that your tax rate is 37%, which is an increase from the one established under the previous administration. But when you file your taxes this time next year (meaning for your 2022 earnings), your tax threshold will be different. For the 2021 tax year, the 37% tax rate applies to households earning $523,601 or more. But by this time next year (2023) and for the 2022 tax year, the 37% tax rate will apply to all those earning at or more than $539,901 as noted by NerdWallet. This means you may wind up owing more in federal income tax in 2023 (for 2022 earnings) than when you file in the next few months.The IRS decided to make these adjustments due to inflation. You can get a breakdown of the tax brackets and tax rates here.
- Standard deduction will increase for the 2022 tax year
Whether you think it’s best to take the standard deduction or itemize is a decision that is best left to you and your accountant, but if by chance you typically go with the former, the standard deduction amounts will increase across the board, NerdWallet further noted. For example, the standard deduction for heads of household in 2021 is $18,800 and $25,100 for those who are married and filing together. But in 2022, the amounts will increase to $19,400 and $25,900, respectively.Whether your filing status is single, married and filing separately, married and filing jointly, or head of household, the standard deduction will be greater when you file this time next year than for your 2021 earnings.
- Longer holding period for carried interest on capital gains
When it comes to tax credits, deductions, depreciation and expenses, the Tax Cuts and Jobs Act (TCJA) was a game changer. Passed in 2017 during the prior administration, the TCJA affected a variety of deductions, including what can be counted as business interest expenses, excess business losses and moving expenses. Some of the changes went into effect the following year, but others were designed to be phased in over time.An example is how API, or applicable partnership interest, is treated from a tax perspective. As the Journal of Accountancy points out, prior to the TCJA, the net long-term capital gains for an API was figured out by applying a holding period of one year for long-term capital gain or loss treatment. But the TCJA changed the holding period to three years.Because this lengthier holding period was for those APIs that occurred on or subsequent to Jan. 1, 2018, more individuals are bound to be affected by it since more time has passed.
- Thresholds on capital gains taxes
Did you recently sell an asset or do you expect to do so some time in 2022? If so, you may be affected by the capital gains tax, depending on how much you sell the asset for and how the earnings accumulate. As a high net worth individual or business owner, you’re subject to the highest rate of 20% for long-term gains. But similar to the standard deduction and the tax bracket changes, the tax threshold will go higher for the 2022 tax year, meaning when you file your taxes this time next year.For the 2021 tax year, if you’re filing as a head of household, the 20% rate applies to any gains at or above $473,751. Starting in 2022, though, the threshold will rise to $488,501. If you’re filing as a single, the rate will move from $445,851 or more to $459,751, to $517,201 or more (from $501,601) if filing with your spouse and $258,601 or more (from $250,801) if filing separate from your spouse.
- What’s considered income for first-time tax filers
Are you the parent of a son or daughter who has started their own business or is earning money for college? You may wonder about how much they need to make before they owe money to the federal government. That number has changed over the years a number of times, largely due to the push and pull of inflation (mainly the push). But it’s due to change again for the 2022 tax year. If your teenager or college student opts to take the standard deduction, they will owe the federal government for earnings that are at or higher than $12,950, as noted by The Wall Street Journal. This is up from $12,550 for 2021.How much money they owe is dependent on how much they earn. But here as well, the brackets have adjusted. For 2022, the tax rate is 10% for earnings that are between $12,950 and $14,650 (up from $14,200) and 12% for earnings ranging between $14,651 and $55,900 (from $14,201 and $54,200).
Are you setting up a trust this year or considering other wealth planning options? Global Financial Distributors may be able to help you reduce your tax liability, as these kinds of taxes are also subject to change. Contact us today to learn more.
