As 2021 draws to a close and the New Year dawns, we need to think of…tax planning! Some years Congress tweaks the laws more than other years. While 2021 held plenty of events: a coronavirus vaccine, new coronavirus variants, a new President, etc., it was a relatively quiet year for legislative changes impacting planning. At first, it seemed as though there could be substantial tax changes. But those changes were watered down, deferred, and may never materialize. Still, even in a quiet year, some things change due to inflation increases, etc.
Estate Tax Planning
Applicable Exclusion rises from $11.7 million in 2021 to $12.06 million in 2022.
GST Exemption rises from $11.7 million in 2021 to $12.06 million in 2022.
Annual Exclusion for present interest gifts rises to $16,000 in 2022.
Annual Exclusion for gifts to a Noncitizen Spouse rises to $164,000 in 2022.
In a few years, at the end of 2025, the Applicable Exclusion and the GST Exemption will revert to one-half of their current levels, in other words to $5 million, adjusted for inflation from the 2011 base year. This isn’t relevant for most Americans. However, if you have well over these amounts, you may want to consider removing these amounts from your estate while you still have the temporarily doubled Exclusion and Exemption to cover the transfers. You still have a few years before the law is set to change, unless Congress changes things dramatically before then.
Income Tax Planning
Standard deduction amount:
Married, filing jointly, increases from $25,100 in 2021 to $25,900 in 2022
Single, increases from $12,550 in 2021 to $12,950 in 2022
Head of household, increases from $18,800 in 2021 to $19,400 in 2022
State and Local Tax (SALT) deduction cap remains at $10,000 in 2022, though proposed legislation could increase that cap significantly.
The income tax brackets creep slightly higher, as well.
As you plan for 2022, remember to keep your receipts for expenses and charitable contributions. With the high standard deduction amount and the cap on State and Local Tax deductions remaining at $10,000, fewer taxpayers are itemizing. In fact, the percentage of taxpayers itemizing is less than half what it was before the Tax Cuts and Jobs Act of 2017. Now, less than 14% of taxpayers are expected to itemize. Before then, over 31% of taxpayers itemized. If you give to charity, you may want to group your charitable contributions into one year and itemize them in that one year. You can do this by giving to a donor-advised fund in one year. Then you can make grant recommendations from your donor-advised fund each year. This way, your tax planning won’t impact your favorite charities.
Let’s look at an example. John and Mary make $15,000 of charitable contributions to their church, alma mater, or other charities each year. They have state and local tax deductions above the $10,000 limit. They have a total of $25,000 of deductions and they’d be better off taking the standard deduction ($25,900 in 2022). Rather than giving $15,000 for each of three years to charity, they could give 3 x $15,000 ($45,000) in one year and they’d get a much better tax result. If they gave $45,000 in year 1 to a donor-advised fund, combined with their SALT deduction of $10,000, they’d have $55,000 of deductions instead of the standard deduction of $25,900. In years 2 and 3, they’d just have the SALT deduction of $10,000 and no charitable deduction but could still take the standard deduction ($25,900 in 2022). The charities would get their funds each year just as usual. John and Mary would get a much better tax result. In year 1, they’d have $55,000 of deductions instead of $25,900, an increase of $29,100. Their deductions in years 2 and 3 would not change. If John and Mary are in the highest income tax bracket, this increased deduction could save them over $10,000 in federal taxes.
A little planning can produce a much better tax result. Have a happy, healthy, and prosperous 2022!
Steve Hartnett, J.D., LL.M (Tax)
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128