Recap of Tax Law Changes for 2022 Filings
By: Nathaniel S. Burt, CPA, PFS, MSAT
Epic Trust CFO, President of Tax Planning and Strategy | Investment Advisor Representative
We collectively witnessed many global changes in 2022: a war in Europe with Ukraine and Russia, a simmering pandemic turned endemic, Elon Musk buying Twitter, the stock market seeing a significant decline, the New York Times purchasing Wordle, Queen Elizabeth dying, and, of course, Will Smith slapping Chris Rock.
One constant in our lives is that US tax laws changed yet again, as they seem to every year. Two major pieces of legislation were passed that impact taxes: the Consolidated Appropriations Act of 2022, and the Secure Act 2.0 (passed in 2022, signed by the president in 2023). Between these two laws, and the already scheduled updates/adjustments, there are quite a few items of importance to mention. Perhaps the most frightening: 87,000 new IRS agents! Eek! More on that later.
Already Scheduled Updates
Overall, the 2022 tax return filing season should be simpler, with no more stimulus payments and no additional Child Tax Credit pre-payments to match up to. Also, the $300 front page charitable deduction given even without itemizing, is now gone. However, the $250 teacher deduction was raised to $300. Additionally, these items are shifting upward due to inflation adjustments:
- The standard deduction: $25,900 for married couples for 2022
- Tax brackets shifting upward: 22% bracket now ends at $182,100 instead of $178,150 for 2023
- Social Security recipients got an 8.7% raise!
- The flip side is that higher wages are subject to FICA taxes, rising to $160,200
- Retirement account contributions: IRA now at $6,500, 401(k) now at $22,500 in 2023
- IRS interest rate increases to 7%, meaning if you wait until after April 15th to pay your taxes, that is the interest rate accruing on any unpaid tax balance.
- For business returns, Bonus Depreciation is getting reduced, down to 80% instead of the previous 100% we’ve enjoyed in recent years.
- Business meals are back down to 50% deductible
- The WA state capital gains tax is still on, even while being challenged in the state supreme court
The Consolidated Appropriations Act of 2022
One of the alarming pieces of this legislation was the amount of funding headed to the IRS. As a tax practitioner, we welcome the idea of better service at the IRS. Have you tried calling them lately, or even tried mailing them something? It has been like trying to reach life in outer space. Supposedly, they are trying to reach a goal in 2023 of answering 85% of phone calls with an average wait time of 15 minutes.
And what to make of the possibility of 87,000 new revenue agents? The nuanced update here is that in the time the 87,000 IRS staff members are hired, 55,000 are on track to retire, meaning there is an expected net gain of 30,000 staff members. Of those new staff members, many will not be in enforcement, rather in service roles. Regardless, thousands in enforcement is still concerning.
Audit rates slowly increased in the last couple of years. While it will take time to train those many new staff members, it is anticipated that audit rates will certainly rise faster starting in 2024. In fact, many think they will at least double for those earning $400-500k and above. This is above and beyond their already robust ‘document matching system’ that automatically sends letters if documents sent to them don’t match to your tax return.
Also alarming are new rules surrounding the reporting form called 1099-K, which merchant processors already send out. But starting next year, money processors such as PayPal, Venmo, and Cash App will be required to send out a 1099-K for anyone with more than 200 business transactions or more than $20,000 in annual receipts through the app. Certainly, this will create duplication for some businesses who already record all their deposits, and more frustrating, catch a lot of non-businesses in that net as well who will now have extra reporting requirements on their tax returns.
There were some items of good news in the Consolidated Appropriations Act. Energy credits were enhanced, including those for solar, for home improvements, and for vehicles. Solar panels, encouraging a return on investment in the 8-to-9-year range, is back to a 30% credit. Home improvement projects that impact home efficiency, now has an annual max of $3,200 instead of the old lifetime maximum of $500. And electric vehicles get to stay at $7,500, with some caveats.
Secure Act 2.0
Changes to retirement accounts brought about by the Secure Act 2.0 will mostly take effect in 2023 and 2024, with a handful beyond that. Here are the highlights:
- Required Minimum Distributions (RMD’s) will increase from age 72 to 75 over the next 10 years (73 in 2023, 75 in 2033)
- Simple and SEP plans can now have a Roth feature (2023)
- 401(k) matching contributions can be treated as Roth contributions (2023)
- The penalty for failure to take RMD on time decreases from 50% to 10%, if the error is rectified by the taxpayer instead of the IRS enforcing it (2023)
- Employers can make matching contributions against student loans (2023)
- Expanded exceptions to early retirement account distributions (2024)
- No RMD’s on Roth 401(k) accounts starting (2024)
- New tax credit for small employer plan startup costs (2024)
- The IRA catch up will be indexed for inflation (2024)
- The 401(k) catch up will be on a Roth basis, and increased to $10k (2024)
- 529 plans can be rolled over to Roth (up to $35,000), as long as it has been in existence for 15 years (2024)
- Auto enrollment into company retirement plans will be required, notably excluding existing plans and small employers (2024)
- The Saver’s Credit will be changed to a federal matching contribution, effective 2027
Getting the Most Out of Your Tax Accountant
I have come to believe that tax season is too short, too rushed, and all around too hectic to brainstorm with each client great tax planning opportunities. It is a time to ensure compliance with the law, to reconcile all activity that occurred in the past year. The compliance piece is essential, and we want to be your guide in that process. We also want to spend time with you July through December looking at strategy, planning for the future, and considering all aspects of your financial life. During this time of compliance don’t be afraid to ask for our time later in the year to proactively look at your specific situation and how we can navigate this ever-changing tax regime in the smoothest waters possible.
