There are several notable changes and considerations for 2022. Let's take a closer look.
TEACHERS AND EDUCATORS
Teachers can include any unreimbursed COVID-19 prevention and cleaning supplies in their educator expense deduction. This deduction allows up to a $300 tax deduction for qualified unreimbursed education expenses. This is an increase from the $250 limit in 2021.
REQUIRED MINIMUM DISTRIBUTION (RMD) STARTS AT AGE 72
The age at which taxpayers must begin taking required distributions has been increased from 70 1/2 to 72. However, taxpayers born before June 30, 1949 must still use age 70 1/2 as the RMD age--and begin taking RMDs no later than April 1st of the year after the year in which they turn 70 1/2. After that, all RMDs must be distributed by December 31st each year. Failure to take RMDs by the specified due date results in a 50% penalty on the shortfall.
Amounts paid for personal protective equipment (e.g., masks, hand sanitizer, home COVID-19 tests, and disinfecting wipes) to help prevent the spread of COVID-19 can be reimbursed through flexible spending, health savings, and medical savings accounts. These expenses also qualify as medical expenses that can be deducted as an itemized deduction to the extent they exceed 7.5% of adjusted gross income.
EMERGENCY FINANCIAL AID FOR STUDENTS
Emergency financial aid grants for an event related to the COVID-19 pandemic are not taxable to the student.
PENALTY-FREE WITHDRAWALS FOR NEW PARENTS
New parents may qualify for an exception to the 10% penalty that normally applies to early distributions (prior to age 59 1/2) from IRA or 401(k) accounts. You can take the withdrawal following a qualified birth or adoption of a new child, provided you do so within a year of birth or adoption. The withdrawal is limited to $5,000 per parent, per eligible retirement account. You also have the option to repay at a later date, although it isn't required.
PART-TIME EMPLOYEES MAY PARTICIPATE IN 401(k)
Part-time workers may contribute to their employer’s 401(k) plan once they have worked 500 hours or more for three consecutive 12-month periods after January 1, 2021. Employers are not required to match contributions.
DIGITAL ASSET REPORTING
Digital assets, like cryptocurrency, will require informational reporting for the 2023 tax year, starting January 1, 2024. This means taxpayers who own cryptocurrency will receive a tax document from their broker that summarizes their digital activity for the tax year, which will be used to prepare your personal tax return. This reporting requirement originated from the Infrastructure Investments and Jobs Act, November 2021. With the delayed effective date, there may be legislative changes to this rule before it’s in force.
INHERITED IRAS: NEW 10-YEAR RULE
Effective in 2020, “non-eligible” designated beneficiaries of IRAs must withdraw all funds from the inherited accounts within ten years. There are no annual required minimum distributions—except the last one. This does not apply to "eligible" designated beneficiary (EDB) including a surviving spouse, a disabled or chronically ill individual, an individual who is not more than 10 years younger than the IRA owner, or a child of the IRA owner who has not reached the age of majority. Additionally, certain trusts named as an IRA beneficiary are considered EDBs.
The Ten-Year Rule also applies to trusts that receive IRA assets on behalf of beneficiaries. If a conduit trust is established to help protect assets, it still must forward all the IRA income to beneficiaries. This would potentially expose the inherited IRA assets to heirs’ creditors and any bankruptcy or divorce proceedings—defeating the purpose of an asset protection trust. In some circumstances, you may wish to have an attorney redraft any existing conduit trusts to allow the trust to retain the assets, rather than distribute income to beneficiaries. The downside is that these assets would then be subject to less favorable trust tax rates. If you have significant assets in retirement accounts that you are planning to pass on to non-spousal beneficiaries, it is a good idea to review your estate plan documents.
FARMERS IN DROUGHT AREA
Farmers living in affected drought areas who were forced to sell certain livestock between 2015 and 2021 have an additional year to replace them and defer any gains on the forced sale. Usually, you have four years to replace livestock from a forced sale. This change will affect those living in counties designated as having exceptional, extreme, or severe drought conditions. Currently, portions of 37 states and territories qualify and only livestock used for draft, dairy, or breeding purposes are eligible. Poultry and livestock raised for slaughter or sport don’t qualify.
Achieving a Better Life Experience (ABLE) accounts are designed to help people with disabilities save and pay for disability-related expenses. Now through 2025, eligible individuals can roll over money from a qualified 529 plan into their ABLE account. And certain contributions made by low and moderate income workers may qualify for the Saver’s Credit which could be as much as 50% of their contribution.
QUALIFIED CHARITABLE DISTRIBUTIONS (QCD)
Taxpayers who have reached age 70 1/2 can donate up to $100,000 of taxable IRA distributions directly to qualified charities. This satisfies the minimum distribution requirement and is excluded from taxable income.
When dealing with investment losses, keep the wash sale rules in mind. These rules prevent you from taking a loss on a security if you buy a substantially identical security within 30 days of the sale. You can avoid triggering the wash sale rules while maintaining the same portfolio allocations by:
- Selling the security and then waiting 31 days to repurchase it
- Selling the security and buying shares in a mutual fund that holds similar securities
Currently, the wash sale rules don’t apply to digital assets, including cryptocurrency. But that could change in the future.
If you’ve invested in a trade or business in which you don’t materially participate, and where income or losses flow through to your tax return, keep the passive activity rules in mind.
Passive activity income may be subject to the 3.8% Net Investment Income Tax and passive activity losses are generally deductible only against income from other passive activities.
In general, a taxpayer materially participates in an activity only if the participation is regular, continuous and substantial. You’re deemed to materially participate if you meet just one of seven tests. So, understand the rules and document your time and activities carefully. (Special rules apply to real estate.)
If you don’t pass material participation rules, consider increasing your involvement to exceed the 500 hour benchmark or dispose of your investment. You’ll generally be allowed to deduct all passive losses in the year of sale, but the rules are complex. So discuss this with your tax professional before you sell a passive investment.
If you are working remotely in a home office that is located in a state outside of your company's primary office location, you may be subject to additional taxes.
Some states impose a “convenience” rule that sources income to the employer’s office location if an employee is working remotely out of convenience and not out of necessity for the employer. Also, changing state residency is typically scrutinized by the original state, because it creates a loss in revenue. Careful consideration must be given to ending residency in one state while establishing residency in another state.