The start of a new year is a good time to consider upcoming changes in the tax laws that may affect your estate planning in 2022.
The federal estate tax exemption is increasing slightly in 2022. Estates of individual decedents who pass away in 2022 will be exempt from federal estate taxes up to $5,490,000, a $40,000 increase from 2016. This increase impacts only the very few American households with taxable estates, but sizable estates are not uncommon in Northern California, particularly in neighborhoods such as Walnut Creek, Danville, Lafayette, and Orinda. Individuals with large estates probably know that Donald Trump campaigned on eliminating the federal estate tax. Whether that will happen remains to be seen; however, according to Len Burman, director of the Tax Policy Center, “the estate tax is history.”
The annual gift tax exclusion remains $14,000 in 2022, which means an individual can make gifts of up to $14,000 without paying gift taxes. Gifts of $14,000 or less can be made to an unlimited number of individuals.
Besides the change in federal law, nine states have changes in estate taxes that go into effect in 2022: Delaware,
Hawaii, Maine, Maryland, Minnesota, New Jersey, New York, Rhode Island and Washington. Most reduce the estate tax. If you live in California, own no property out of state, and your heirs all live in California, the changes will not affect you. Individuals with sizable estates who own significant assets outside California should consult an attorney licensed in the state where their property is located.
Individuals can earn $1000 more (and married couples $2000 more) and remain eligible to contribute to a Roth IRA. Individuals earning less than $118,000, and married couples filing jointly earning less than $186,000 remain eligible.
Another change relates to medical expense deductions. Starting in 2022, if you are 65 or older, your medical expenses must exceed 10% of your Adjusted Gross Income before you can claim itemized medical expenses. Previously, individuals 65 and older used a 7.5% threshold before itemizing and deducting medical expenses.