Another year has come to an end, which means new changes to the Internal Revenue Service (IRS) and Social Security Administration (SSA) guidelines.
In tough economic times, you shouldn't underestimate the importance of paycheck planning. First, planning your paycheck is essential if you live paycheck to paycheck. And more importantly, understanding the changes for 2022 will help you better prepare for any financial situation.
These are some of the changes that may affect your 2022 income.
- Defined Contribution Plans. Defined contribution plans face an increase, which brings the contribution limits to $20,500 for 401(k) plans and $14,000 for SIMPLE 401(k) plans. Additional catch-up contributions for those aged 50 and over also remained fixed at $6,500 for traditional and safe harbor 401(k) plans and $3,000 for SIMPLE 401(k) plans.
- Individual Retirement Accounts. Following the trend of 2021, IRA contribution limits remain steady for 2022 at $6,000 annually. However, investors aged 50 and over are allowed "catch-up" contributions of $1,000, raising the limit to $7,000 annually.
- Defined Benefit Payment Plans. Defined benefit limits increase by $15,000, bringing the total to $245,000.
- Social Security. Social Security benefits credits saw a $40 increase in 2022 from $1,470 in 2021 to $1,510 in 2022. The amount of money you can earn through employment without reducing your Social Security benefits has also increased from $18,960 in 2021 to $19,560 in 2022. Those who reach full retirement age in 2022 will experience increased maximums of $51,960, up from $50,520 in 2021.
- Social Security Taxes. For 2022, the Social Security tax rate is a total of 12.4 percent. That represents 6.2 percent for the employer and 6.2 percent for the employee, on the first $147,000 of employee income.
- Social Security Benefits. Social Security benefits recipients will enjoy a 5.9 percent Cost of Living Adjustment (COLA) for 2022. The increase is more significant than in recent years. Still, it remains good news for those who rely on their Social Security benefits when budgeting.
- Medicare Tax. Medicare tax remains unchanged over 2019, 2020, and 2021 rates at 1.45 percent on up to $200,000 in wages. People who earn more than $200,000 are required to pay an additional 0.9 percent.
- Standard Deductions. In 2022, standard deductions for married couples who file jointly increase to $25,900, representing an $800 increase over 2021. The rate increases by $400 to $12,950 for single payers or married couples filing individually for 2022. Heads of households have standard deductions of $19,400, increasing by $600 from 2021.
- Flexible Spending Accounts. FSAs enable you to pay many of your eligible out-of-pocket health care expenses with tax-free funds. This year the FSA contribution limit increases by $100, to $2,850.
- Adoption Credit. There has been an increase in the maximum credit for child adoption. The tax credit amount was $14,440 in 2021. It has increased by $450 to $14,890 for 2022. This relief is in the form of a tax credit that helps offset some of the costs involved in adopting a child.
Tax codes change from year to year, requiring you to revisit your budget, deductions, living expenses, saving plans, spending, and retirement investing for the coming year. The better you understand these changes and how they may impact your bottom line, the better you are positioned to make appropriate adjustments. This guide can help you prepare for the paycheck planning process for 2022 to avoid potential pitfalls.