We all get sentimental from time to time, but unless you hit the lottery or found true love, you probably won't be looking back on 2021 all too fondly. The COVID-19 pandemic is still with us, inflation is rising, and ABBA, inexplicably, dropped a new album.
Although everyone’s retirement is different, 2022 is going to have some big differences from 2021 that will affect almost every retiree and retirement saver to some degree. You’ll see changes in your tax rates and deductions, for example, as well as a bump up in your Social Security check if you're already collecting benefits. You’ll also be able to sock away a bit more in your retirement accounts. Here’s a closer look at what you need to know.
Standard deduction goes up
Let’s start with the good news first: Higher standard deductions for your federal income taxes. Taxpayers get to choose between taking a standard deduction and itemizing their deductions. Deductions lower your taxable income and thus your taxes.
Because it’s so large, the standard deduction usually produces a bigger reduction in taxes than itemizing does. Most people choose the standard deduction. In 2022, when you fill out your federal income tax forms for income earned in 2021, married couples will get a standard deduction of $25,100, up $300 from tax year 2020. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550, up $150 from the previous year.
For those who like to plan well in advance, the standard deduction for income earned in 2022 — and which you can claim when you file your return in 2023 — will rise as well. The standard deduction for married couples filing jointly for tax year 2022 rises to $25,900, up $800 from 2021. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 for 2022, up $400.
If you are 65 or older (or blind) and file as a single taxpayer, you get an extra $1,700 standard deduction for tax year 2021 and an extra $1,750 for tax year 2022. Married and filing jointly? The extra standard deduction is less per person: $1,350 for tax year 2021 and $1,400 for tax year 2022. For taxpayers who are both 65-plus and blind, the extra deduction is doubled.
Special charitable deduction goes away
Now for a bit of bad news on the tax front: A temporary tax break that allowed many Americans to easily write off some donations to charity won't be around in 2022. On 2021 tax returns, single taxpayers can deduct $300 in certain charitable contributions, and married taxpayers can deduct $600. This break applies to people who take the standard deduction; you can’t take it if you itemize your deductions. The qualifying charitable deductions had to be made by Dec. 31, 2021.
Further, the $300 deduction is for 2021 donations made in cash, which includes currency, checks, credit or debit cards, and electronic funds transfers. You can't take the deduction for contributions of property, such as clothing or household items. You must also make your contributions to qualified charities. Ask the charity whether it's a qualified organization per the IRS, or check online using this tool on IRS.gov.
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Retirement plan distributions
When you filed your 2020 tax return in 2021, you were able to take advantage of some terrific pandemic-year tax breaks. For example, you didn’t have to take any required minimum distributions (RMDs) from your tax-deferred retirement accounts, such as traditional IRAs and 401(k) savings plans. In addition, the government allowed people younger than 59 1/2 to take up to $100,000 from their retirement accounts in 2020 without the usual 10 percent penalty. Furthermore, it allowed people to spread out the tax on their retirement plan withdrawal over three years — and to replace that money in their accounts if they wanted to.
Well, those tax breaks are gone, even though COVID-19 is still with us. If you were already taking RMDs in 2019, you needed to resume taking them for 2021. Distribution were due by Dec. 31, 2021. However, because the age to start RMDs was raised from 70 1/2 to 72, anyone who turned 72 after June 30, 2021 has until April 1, 2022 to take their first RMD only. Subsequent RMDs are due by the last day of the calendar year. You can find out how much you need to withdraw from your retirement accounts by using AARP’s RMD calculator— or consulting a tax professional.
If you’re younger than 59 ½ and took out money from your tax-deferred retirement savings in 2021, you’ll owe a 10 percent penalty on your entire distribution — as well as ordinary income taxes on the amount you withdraw. Spreading your tax over three years? Nope, sorry. That only applied to 2020 distributions.
Retirement plan contributions
On the other hand, you will be able to contribute more to some retirement plans in 2022 than you did in 2021. For workplace accounts such as 401(k)s and 403(b)s, retirement savers can contribute as much as $20,500 in 2022, an increase of $1,000 from 2021. Those 50 and older can add an extra $6,500 — the same catch-up contribution amount as 2021 — for a maximum 2022 contribution of $27,000.
The 2022 contribution limit to traditional IRAs and Roth IRAs remains the same as 2021: $6,000. Retirement savers 50 and older can add another $1,000 as a catch-up contribution, for a total of $7,000, the same as 2021.
Here are the income limits for deducting traditional IRA contributions and for making Roth IRA contributions, based on your modified adjusted gross income (MAGI).
|Traditional IRAs — 2021 vs. 2022 deduction limits|
|Filing status||2021 MAGI||2022 MAGI||Deduction|
|Single or head of household||<$66,000||<$68,000||Full deduction|
|>$66,000 and <$76,000||>$68,000 and <$78,000||Partial deduction|
|Married filing jointly or qualified widow(er)||<$105,000||<$109,000||Full deduction|
|>$105,000 and <$125,000||>$109,000 and <$129,000||Partial deduction|
|Married filing separately||<$10,000||<$ 10,000||Partial deduction|
|Roth IRA — 2021 vs. 2022 contribution limits|
|Filing status||2021 MAGI||2022 MAGI||Contribution|
|Single or head of household||<$125,000||<$129,000||Full contribution|
|>$125,000 and <$140,000||>$129,000 and <$144,000||Partial contribution|
|Married filing jointly or qualified widow(er)||<$198,000||<$204,000||Full contribution|
|>$198,000 and <$208,000||>$204,000 and <$214,000||Partial contribution|
|Married filing separately||<$10,000||<$10,000||Partial contribution|
Social Security payout rises 5.9 percent
Here’s something you haven’t seen in a long time: A big Social Security cost-of-living adjustment (COLA). The 5.9 percent hike is the biggest since 1982, and it applies to Supplemental Security Income (SSI) benefits, too.
The average retirement check will increase by $92, to $1,657 starting in January 2022. Supplemental Security Income checks will get a boost as well. The maximum monthly SSI payment in 2022 will be $841 for an individual, up $47 from 2021, and $1,261 for a couple, up $70.
The COLA also applies to other parts of Social Security. The maximum Social Security retirement benefit for a worker at full retirement age will rise to $3,345 a month in 2022, up from $3,148 in 2021. The full retirement age for people born in 1956 is 66 years and four months, and rises gradually to 67 for those born in 1960 or later.
If you claim Social Security early and keep working before you reach full retirement age, the Social Security Administration (SSA) will withhold $1 for every $2 you earn above $19,560 a year, up from $18,960 in 2021. If you’re working in the year you reach full retirement age, SSA holds back $1 for every $3 you earn, up to $51,960, up from $50,520 in 2021. After you reach full retirement age, you won’t have any more withheld from your check for working, and your benefit will be adjusted upward to account for the amount of money already withheld.
But Medicare Part B premiums rise, too
If you are 65 or over and already claimed Social Security, Medicare Part B premiums are deducted directly from your monthly check, and those premiums will rise sharply in 2022. Because of inflation (and because the 2021 increase was limited by Congress), Medicare Part B premiums jumped to $170.10 for 2022, an increase of $21.60 from $148.50 in 2021. A beneficiary who has a $1,657.30 monthly benefit in 2022 would pocket a net benefit (after the $170.10 2022 Part B deduction) of $1,487.20.
So will Social Security payroll taxes
Someone has to pay for Social Security, and if you're working that someone is you and your employer. The payroll tax to fund Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program is set at 6.2 percent for employers and 6.2 percent for employees. The self-employed pay the whole freight: 12.4 percent. The rate won't change in 2022.
What will change, however, is the maximum amount of income to which that tax applies. In 2022, you pay OASDI tax on income up to $147,000, up from $142,800 in 2021. The rate for Medicare's Hospital Insurance (HI) program remains at 1.45 percent for employees and 1.45 percent for employers (2.9 percent for the self-employed). It applies to all income.
Odds are very, very good that your estate will not be taxed by Uncle Sam. The basic exclusion amount on the estates of people who die in 2022 is $12.06 million, up from $11.7 million in 2021. It's double for couples. Keep in mind, however, that some states impose their own estate and inheritance taxes on top of the federal estate tax.
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner's USA Today investing column ran in dozens of newspapers for 25 years.