It is always important to stay up-to-date with changes in the tax code to avoid IRS tax problems. The year 2022 has brought new changes to retirement plans in the US. Firstly, the contribution limit of retirement accounts, including 401(k), 457, and 403(b) has been increased by $1,000, making it $20,500 from the initial $19,500 limit in 2021. Secondly, the traditional and Roth Individual Retirement Account (IRA) contributions have increased tax deduction thresholds. Here’s everything you need to know about the changes and their effects on your income.
Reason Behind Increase In 401(k) Contribution Limit
The IRS sets a yearly limit to stop highly paid individuals from profiting disproportionately from saving accounts like 401(k) and IRAs. These caps are also adjusted to account for the annual inflation. In 2021, the inflation rate in the US was higher than usual, which resulted in an abnormal increase in the 401(k) contribution amounts. Employed taxpayers who are over the age of 50 can still make a catch-up contribution to their qualified retirement plans, which remains unchanged at $6,500, amounting to a yearly maximum of $27,000.
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Traditional IRAs allow taxpayers to stow pre tax funds for retirement. Deferring taxes until the taxpayer retires and has a lower taxable income allows them to be taxed at a lower rate. The yearly contribution and the catch-up contribution (for taxpayers aged 50+) to a traditional IRA are still capped at $6,000 and $1,000 respectively. Phase-out ranges have been increased in 2022 to keep up with inflation. Phase-out ranges for traditional IRAs, however, have been altered in many ways. The range for single taxpayers covered by workplace retirement plans and married couples filing jointly has increased, whereas the phase-out range of married couples filing separately remains the same.
Changes In Roth IRA Phase-Outs
Although Roth IRAs cannot be used to deduct contributions on taxes, the IRS still applies phase-out ranges to determine the contribution amounts. Many earners are eligible to contribute a lower amount, whereas high-income earners cannot contribute at all. These ranges have also been increased for 2022, affecting both individual taxpayers and married couples filing together.
Increased Saver’s Credit Contribution Limit
Taxpayers with low and moderate incomes can save for their retirement with a tax credit of 50%, 20%, and 10% of their contribution, based on their income using saver’s credit. The income limit for married couples filing together has been increased from $66,000 to $68,000, whereas the limit for an individual or married couples filing separately has increased from $33,000 to $34,000.
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How Do These Changes Affect You?
Understanding the implications of any changes to the tax code not only helps to avoid related IRS tax problems but also puts you in a position to take advantage of favorable avenues. If you have already reached the 19,500 dollar contribution last year, this limit increase provides you with a choice to add more to your yearly contributions. If you come in the bracket of taxpayers who contribute a reduced amount to their retirement accounts, then these changes don’t affect you at all. You can get in touch with a seasoned tax lawyer in the Dallas – Fort Worth metroplex to get more clarification on how these and other changes impact you as a taxpayer.
No matter how much you earn, you should explore all the tax benefits provided by retirement plans, as they allow you to secure your future and save money. If you’re looking for advice concerning retirement plans or IRS tax problems, the Law Offices of Nick Nemeth is here to help. We have a record of providing help with IRS tax problems including IRS tax relief to taxpayers in the Dallas – Fort Worth community. Reach out to us for a no-obligation consultation with a leading IRS tax resolution attorney by calling (972) 426-2553 or filling out our contact form, and we’ll get back to you as soon as possible.