The newly identified omicron COVID variant rattled markets on Friday, November 26th. The S&P 500 index’s 2.25% decline was the third 2%-or-greater drawdown in equities this year, though it regained some of the lost ground on Monday. As long-term investors we are reminded of how volatile markets can be and the importance of diversification, such as bonds performing their stabilizing function on Friday, ending the day up 0.7%. Overall, the financial markets in 2021 have performed very well and consequently have also left our clients’ portfolios in better shape compared with a year ago, with the U.S. stock market up 23% YTD. In politics, there has been much ongoing debate in Washington about tax policy changes related to funding President Biden’s proposed social, climate, and infrastructure bills. Some of the proposed tax policy changes (as of this writing late-November) may impact our clients’ financial situations for 2022 and beyond, so with December just around the corner and the holidays beckoning, it is worth reviewing a few key tax and estate planning strategies before 2021 is in the rear-view.
- Roth Conversions. For 2021, the following guidelines still apply. If you wish to explore a Roth conversion (which could potentially save you or your heirs taxes over the long-term), please contact us before December 10th.
- Anyone with an IRA can do a Roth conversion. There are no income limits.
- Inherited (beneficiary) IRAs cannot be converted.
- There is no limit on the amount that can be converted.
- There is no 10% penalty on a Roth conversion, regardless of age. However, if you are under 59 ½ and have the taxes on the conversion withheld (paid) from the IRA, there can be a 10% penalty on the amount withheld. As such, it is usually recommended that if you are under 59 ½, you pay the taxes due on a Roth conversion from a source other than the IRA.
- Roth conversions are added to adjusted gross income (AGI). This can impact items tied to AGI such as financial aid and taxability of Social Security.
- Taxes on conversions are not due immediately. The amount of the Roth conversion is added to your yearly income, and you can settle with the IRS in April.
- Partial conversions are allowed. Implementing a strategy of partial Roth conversions specific to your financial situation can help manage taxes and mitigate risk.
- A Roth conversion must be initiated by the end of the calendar year (December 30th) to qualify for that same tax year. (The funds being converted must be withdrawn from the traditional IRA by year end.)
- For IRA owners taking lifetime required minimum distributions (RMDs), i.e., they are older than 70 ½ or 72, the RMD must be taken before any Roth conversion can be done.
- Each Roth conversion will start its own 5-year clock which must be satisfied (or you turn 59 ½) before the converted dollars can be withdrawn penalty-free.
- Beginning January 1st, 2022, the current proposal would eliminate the ability to convert IRA contributions with basis (non-deductible) to a Roth IRA. Also, no longer could you convert 401k pre-tax basis to Roth IRA.
- Required Minimum Distributions (RMDs). Each year we review our clients’ status regarding RMDs. We will reach out to you via email to confirm remaining amount, method of distribution, and federal/state tax withholding rates. As the rules currently stand, you must take out your first required minimum distribution from your IRA by April 1st of the year after you turn 72. For all subsequent years, you must take the money out of your accounts by December 31st. The RMD (and subsequent taxes owed) amount is determined each year based on age in a RMD table that the IRS maintains. Inherited IRA’s have varying rules on distributions depending on the year you inherited the account. We will keep track of that for you and reach out before processing distributions.
- Qualified Charitable Distributions (QCDs). If you wish to make a QCD for this year, please make sure the funds are received and deposited by the organization by December 30^th. Qualified charitable distributions are one of the most tax-efficient ways to make charitable gifts because they reduce taxable IRA balances at no cost. The one downside is that QCD’s are not available to everyone as only IRA owners and beneficiaries aged 70 1/2 or older qualify. It is not available from company plans and not permitted to go to donor-advised funds or private foundations. QCDs are limited to $100,000 per year for each IRA owner. These distributions are considered an exclusion from income which is better than a deduction from income, so those who are worried about reaching a certain Medicare limit do not have to consider the QCD as part of their income. Also, don’t forget that the CARES act allows everyone to exclude $300 in charitable giving from income for non-itemizers (cash gifts).
- Social Security beneficiaries will receive a 5.9% COLA beginning January 2022. One key benefit of Social Security is that it is indexed for inflation each year.
- Medicare Parts A and B premiums, deductibles, and co-insurance are increasing for 2022, as well as new income-related adjustments for Part D prescription drug coverage.
- Part A. For those who must pay for Part A coverage, here’s what’s changing for 2022:
- Premium increasing $15 to $274/month. Certain older individuals with less than 30 quarters of coverage pay the full premium of $499/mo, a $28 increase from 2021.
- Inpatient Hospital deductibles increasing from $1,484 to $1,556/year.
- Co-insurance increasing by ~5-7% depending on the category.
- Part B:
- Standard monthly premium increasing by $21.60 to $170.10/month for incomes between $0 - $182,000 (MFJ). Higher incomes will pay more, up to $578.30 for incomes above $750,000 (MFJ).
- Standard deductible increasing $30 to $233/year.
- Part D:
- Monthly adjustments of between $0 - $77.90 depending on income.
- Part A. For those who must pay for Part A coverage, here’s what’s changing for 2022:
- 2022 contribution limits to IRAs and Roth IRAs remain at $6,000, and the over 50 catch-up contribution limit also remains unchanged at $1,000 ($7,000 total).
- However, the income phase-out range for taxpayers making contributions to a Roth IRA in 2022 will increase from $129,000 to $144,000 for singles (up from $125,000 to $140,000), and for married couples filing jointly the income phase-out range is increased to $204,000 to $214,000 (up from $198,000 to $208,000).
- 2022 maximum employee contributions to 401k, 403b, and most 457 plans increase to $20,500, up from $19,500 for 2021 and 2020. Also, maximum employee contributions to SIMPLE plans will increase to $14,000 in 2022 up from $13,500.
- State and Local Tax (SALT) exemptions. The current proposal would extend the SALT deduction for six years (through 2031) and increase the SALT deduction cap from $10,000 to $80,000 through 2030 before lowering back to $10,000 for 2031. AGI limits may apply.
- Estate and Gift Tax Exemptions. No change in the current proposal, it is still $11.7 million per person going to $12.06 million ($24.12 million for a married couple) in 2022. These exemptions are scheduled to drop back to approximately $6.2 million per person ($12.4 million for married couples) after 2025, although they may be adjusted before that time as tax policy changes work their way through the legislative process. Here are the current guidelines:
- The annual gift tax exclusion increases from $15,000 in 2021 to $16,000 ($32,000 for a married couple) in 2022. These gifts can be made to any number of people each year and they do not reduce the lifetime gift/estate exemption. These are always tax free.
- Unlimited gifts for direct payments for tuition and medical expenses. These gifts can be made to anyone, the amounts used are unlimited, and they do not reduce the gift/tax exemption.
- Gifts can be made to family members to pay the tax on Roth conversions or to pay for life insurance. Gifts can also be made to help children or grandchildren pay down student loans. One area to watch is when you are gifting property other than cash. Appreciated assets currently receive a step-up in basis when the owner dies. The increase in basis would eliminate the income tax on any appreciation during the decedent’s life. Also, loans to the next generation, establishing trusts, and other strategies may be worth exploring with a tax attorney.
With uncertainty and risk ever-present in the markets, identifying areas you can control (such as a sound financial plan, a well-diversified portfolio, and periodically checking to make sure that your plans are on-track to achieve your goals) can relieve some of the stress.
If you have questions on these strategies or wish to explore any of them in more detail, please contact us and we can discuss your particular situation.
Looking forward to navigating 2022 together with you!