Death and taxes. We can count on both coming around eventually and, much like life insurance itself, it’s best to be prepared. Still, when it comes to taxes, it’s hard to stay up-to-date and understand exactly what is required of you, especially if you’ve made the decision to purchase a life insurance policy or place your money in annuities. In the same way that we can help you with finding an independent insurance agent and be prepared for later in life or leave your family prepared for your passing, we can also help you understand what’s required of you for the upcoming tax season.
Quick Links
- Why the Tax Code Changes
- Taxes 2022: Changes You Need to Know
- How Life Insurance and Annuities Impact Your Taxes
- What You Need to Know to Prepare to File
Why the Tax Code Changes
Perhaps one of the most frustrating and complicated aspects of doing one’s taxes is the fact that it seems like the tax code is constantly changing. However, the tax code is often evolving in response to a shifting economy. It’s designed to, among other things, help Americans navigate issues like inflation, retirement, and general economic growth or recession.
As legislation that includes tax code or tax structures is approved and voted into law, those acts often include dates and deadlines for upcoming changes so you can talk with a tax professional and be prepared.
Taxes 2022: Changes You Need to Know
Perhaps the biggest change to come in 2022 is the significant increase in the standard deduction. In 2022, married couples filing jointly will see the standard deduction increase from $800 to $25,900. Single taxpayers will see an increase from $400 to $12,950. Heads of household will see the standard deduction increase from $600 to $19,400. All of these are significant increases from 2021.
Similarly, tax brackets have also shifted meaning most people will be taxed at a lower rate and see either a larger refund or decreased amount due. Those who claim child tax credits, however, will see a reduction in that tax credit. In fact, it will drop to a maximum of $2,000 per dependent under age 17 for 2022, down $1,000-1,600, depending upon the child’s age.
Additionally, extensions of the child and dependent care tax credit have now expired. In fact, the income cap for the maximum credit has lowered to those earning $15,000 or less and the credit itself is now $1,050 for one person and $2,100 for two or more people.
And, for those without children, the Earned Income Tax Credit (EITC) has also shrunk by nearly 50%.
The final change to be aware of is that during the pandemic, individuals were allowed to deduct $300 ($600 for couples filing jointly) who donated cash to a registered charity. However, that deduction is no longer available. Charitable contributions will, once again, need to be itemized on Schedule A for the 1040 form.
The short version is that, for tax year 2022, relief instituted during the pandemic is sunsetting while other regulations are designed to counteract inflation and other economic challenges.
How Life Insurance and Annuities Impact Your Taxes
When it comes to the beneficiaries of life insurance or annuities, they generally will not have to pay taxes on any policy payouts. However, if there is interest accrued on those accounts, that should be reported and is taxable.
When it comes to taxes and annuities, all annuities are taxable upon early withdrawal, but the money used to create the annuity determines how much of the annuity is taxable. More specifically, qualified annuities are taxable for the full amount as they are created using pre-tax funds. Non-qualified annuities are only taxable for the interest.
Life insurance, like annuities, may be taxable if there is an early withdrawal, but beyond that it gets slightly more complex as there are a few nuances. For example, cash withdrawals that decrease the death benefit, may be taxable, partially or in full.
Considering how your life insurance or annuities will impact your taxes is a great conversation to have when considering your options.
What You Need to Know to Prepare to File
If you’re working with a tax preparation service or have a CPA of your own, they’ve likely already sent you what they’ll need to help you prepare to file your 2022 tax return. And, thankfully, they’ll also have last year’s tax returns on hand, because you’ll also need those.
You’ll need any income statements, including both 1099s and W-2’s.
You’ll also want to consider what deductions you’re entitled to. Common deductions include:
- Charitable donations
- Retirement account contributions
- Property taxes and mortgage payments
However, additional deductions are possible for things like state and sales tax, classroom expenses for teachers, and medical bills that exceed 7.5% of your income.
You’ll want to gather any payments you have made throughout the year towards your taxes. Tax professionals can often help you determine estimated tax payments which can help you spread out payments over time if you suspect you’ll owe money on your taxes.
Finally, you’ll want to include any credits you may be eligible for including education, children, and retirement.
Remember, when it comes to taxes, if you have questions, it’s always best to ask the resources around you who have the expertise to offer you qualified advice. And, when it comes to life insurance and annuities, you also want to contact the experts.
If you’re interested in exploring life insurance or annuities as a way of preparing for retirement and taking care of your family after your passing, reach out to us today and let us connect you with an ELCO agent. Preparing for the future, and the inevitable, like death and taxes, is always advisable.
ELCO Mutual and its representatives do not offer tax or legal advice. You are encouraged to consult your tax advisor concerning the use of the information in this article.