As Congress continues to debate tax proposals within the Build Back Better bill, many high-net-worth individuals have questions about how to plan for anticipated changes to their tax liability. Regardless of the legislative outcome, here are some annual considerations to make when working to reduce your tax burden.
Take Advantage of Giving Gifts
For the first time in several years, the annual gift tax exclusion will be raised in 2022 from $15,000 to $16,000. This means that in 2022, an individual can give an annual gift of up to $16,000 per person ($32,000 for married couples). There is no limit to the number of individuals to whom you can give gifts, and the annual gifts don’t count toward your lifetime gift and estate tax exemptions.
Make Contributions to 529 Plans
As the cost of higher education continues to outpace inflation, more families are incorporating 529 savings plans into college planning for children and grandchildren. 529 plans offer a unique opportunity to reduce one’s taxable income for federal income tax purposes, especially by leveraging a “frontloading” technique which allows for a one time $80,000 contribution to be made in 2022. This contribution can be made once per a 5 year period and needs to be reported on a Form 709 for each of the 5 years, but is an excellent strategy to accelerate college savings while also reducing tax liability.
Maximize Retirement Savings
One of the most readily available, but often overlooked, strategies to reduce one’s taxable income is to maximize retirement savings. For individuals with access to an employer sponsored 401(k) plan, the annual contribution limit increases in 2022 from $19,500 to $20,500. And if you are 50 years old or older, that limit increases to $27,000 in 2022.
If you are a non-working spouse, you can still contribute to an IRA provided your working spouse earns enough to cover the contribution levels. That means if your spouse earns at least $12,000 in earned income, you can each contribute up to $6,000. You can each contribute an extra $1,000 as a catch-up provision if you are 50 years old or older. This can also be an excellent tax mitigation strategy for couples who are semi-retired and wish to extend retirement savings while reducing their tax liability.