Throughout the year we get many inquiries on annual changes in tax laws. This post is a summary of the more frequently asked questions around tax laws in a rapid-fire format.
IRS Mileage Rate
First will be the IRS standard mileage rate for reimbursement. This would typically be how much a business reimburses employees if they are driving their car for business purposes. From January 1, 2022, through June 30, 2022, the rate is 58.5 cents per mile. For July 1, 2022, through December 31, 2022, the rate is increased to 62.5 cents per mile
Social Security Wage Base
For 2022 the Social Security Wage Base is $147,000. This means that an employee only has Social Security taxes withheld on the first $147,000 of wages that they earn. Why is this important? Decades ago, there was a tax strategy for owners of S Corporations to pay themselves a small wage and take the rest of their income as distributions from their business which would not be subject to Social Security and Medicare taxes. About 20 years ago the IRS conducted a field study and cracked down on this so-called strategy. Our advice to owners of S Corporations is to pay yourself a market rate level of compensation for the services that you are providing the business and, in most cases, ensure that you are paying yourself more than the Social Security Wage Base.
2022 Maximum 401(k) Contributions
For 2022 the maximum 401(k) contribution for an employee is $20,500. If you’re over 50 years old, you can put in another $6,500, for a total of $27,000.
Our suggestion is to take a look at your payroll and deductions setup to make sure you are contributing the maximum. The maximums are typically updated annually, and many people don’t review their deductions to ensure they are getting the maximum benefit.
2022 Gift Tax Limit
For 2022 the gift tax limit is $16,000. You can gift any one person $16,000 and it does not reduce your unified credit. For the last several years the limit was $15,000 per person and now it has been slightly increased. You can gift to anybody $16,000 on an annual basis without being required to file a gift tax return. If you’re married, that means you and your spouse together can give $32,000 to any one person.
Estate Tax Exemption
Estate tax is a federal or state levy on inherited assets that exceed a certain value. Currently a person can transfer $12,060,000 in value to their heirs without incurring an estate tax. A married couple can transfer $24,120,000 in value to their heirs without incurring an estate tax. Any amount transferred more than this is currently taxed at 40% by the IRS. In the last 30 years this amount as fluctuated between $600,000 and in 2010 there was no estate tax. Currently this threshold is very high. We would expect over the next couple of years that legislation will be introduced to cut this in half. As a result, there is a fair amount of estate planning that can take place now to transfer assets to your heirs and reduce your exposure to the estate tax.
If you have any questions about tax laws or the subjects above please send us an email or give us a ring.