The Internal Revenue Service (IRS) has released annual inflation adjustments for 2022. These include increased gift, estate and generation-skipping transfer (GST) tax exemptions (the “unified credit”), annual gift tax exclusions, retirement account limits and updates to life expectancy tables for calculating required minimum distributions from IRAs. The changes are as follows:
- The unified credit will increase to $12.06 million for an individual (from $11.7 million in 2021). This means that a married couple will have $24.12 million of available exemption (up from $23.4 million in 2021) assuming portability is properly elected on the predeceased spouse’s federal estate tax return.
- The annual gift tax exclusion will increase to $16,000 (from $15,000 in 2021). As a result, individuals will be able to give $16,000 per year ($32,000 for a married couple) to any number of persons (or trusts) gift tax free.
- The annual gift tax exclusion for gifts to non-US citizen spouses will increase to $164,000 (from $159,000 in 2021). Note that gifts made to a US citizen spouse are not taxable in any amount whether made during the spouse’s lifetime or at death.
- The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan will increase to $20,500 (from $19,500 in 2021). Individuals, age 50 and older, can make an annual catch-up contribution up to $6,500 (no change from 2011), for a total contribution of $27,000.
- The contribution a self-employed business owner can add to his/her SEP IRA will increase to $61,000 (from $58,000 in 2021).
- The contribution limit to a SIMPLE IRA will increase to $14,000 (from $13,500 in 2021). Individuals, age 50 and older, can make an annual catch-up contribution up to $3,000 (no change from 2021), for a total contribution of $17,000.
- The contribution limits to Traditional and Roth IRAs have not changed for 2022 and remain at $6,000 with catch-up contributions, for those age 50 and older, at $1,000 for a total of $7,000.
- The life expectancy tables, mainly used to calculate required minimum distributions (RMDs) from IRAs, were revised and reflect an increase in life expectancies since the last tables were issued nearly 20 years ago. The new tables are effective for RMDs beginning on January 1, 2022. The updated distribution periods will generally provide smaller required payment amounts than those calculated using the previous tables. One provision of the final regulations for updated life expectancy tables is the “transition rule” which allows a beneficiary who has already locked into a life expectancy for RMD payouts to use a “one-time reset” to take advantage of the longer life expectancies in the new tables.
While transfer tax exemptions and contribution limits remain at historically high levels, legislative proposals could threaten to put an end to many common estate tax planning techniques. The IRS has also cautioned that legislation pending in Congress might affect 2022 tax returns and taxpayers should consult future IRS guidance to determine if the adjusted figures remain applicable in 2022. While taxpayers should consider updated proposals’ impact on estate and wealth planning, if your assets are significant enough to constitute a taxable estate, year-end planning has even more significance in 2022.
First, the unified credit is scheduled to drop to $5 million per person on January 2026, even if Congress does nothing. Taxpayers who have not used the “extra” exemption before then will lose it forever. Therefore, clients should consider additional gifting, especially because the IRS has already confirmed that there will be no “clawback” for use of the increased exclusion amount if a taxpayer dies after the unified credit has been reduced. Second, any post-appreciation transfer on gifted assets accrues outside of the taxpayer’s estate. This is especially important for younger individuals and for transferred assets with high potential for appreciation. Finally, for individuals who have already used all of their estate/gift tax exemption, the current low interest rate environment makes certain advanced estate tax planning techniques more likely to succeed.
Given what is expected on the horizon, it is important that all estate plans be reviewed for any potential impact.