3 Important Tax Guidelines You Need to Know in 2022

We’ll explain how working remotely may impact your tax return, the tax rates for long-term capital gains, and how some business owners can work around the cap on state and local tax deductions (SALT).

Did you work remotely for most of 2021? According to a Gallup Panel, 45% of employees still worked from home fully or partly at the end of 2021.¹Other employees took advantage of a hybrid or remote workplace, packed up the family, and traveled across the country, often working remotely from multiple states.

But how does telecommuting, including working from multiple states, impact your 2021 tax return? It turns out, sightseeing or moving closer to family makes the tax season much more complex. Here’s why: every state’s tax system operates a little differently. Tax rules can vary based on how long you work in a state, the income you earn, and how to account for your permanent home.

In general, you should know that:

You always owe taxes where you permanently reside. Your permanent residence (“domicile state”) is where you live most of the time, vote, and register your car. However, the laws for determining your permanent residence can vary across states.
If you live in a different state than where you earn income, you may have to file there too. Let’s say you own a company in New York, but live most of the year in North Carolina. Be prepared—you may have to file a New York return too.
Some states give you a tax break for filing in multiple locations, while others won’t. If you live in a state that has a reciprocal agreement with the state where you worked, you may be in luck. Just know that this tax credit varies. In general, however, working remotely usually means you’ll owe more taxes or the same amount—not less.

Fortunately, information can give you power. If you plan to continue working remotely, I encourage you to do your research. Talk to an accountant about the local tax laws that apply to you. There’s no one-size-fits-all answer, so it’s critical to understand the laws where you live and work, and then make decisions based on what’s best for your family.

What You Pay On Your Long-Term Capital Gains May Have Changed

Long-term capital gains, like the sale of property, stocks you’ve owned for years, and even family heirlooms, are always taxed at a lower rate than short-term capital gains (assets you’ve owned for a year or less).

If you’re an investor who made some money in 2021, good for you. Just don’t forget, you’ll need to pay taxes on those earnings. Fortunately, in 2021 and 2022 Congress didn’t change the tax rates for long-term capital gains and dividends. They stay steady at 0%, 15%, or 20% of your earnings, depending on your income tax bracket.

Instead, Congress adjusted the income threshold for these tax rates, making it a little higher for each tax bracket. You can check out the 2021 and 2022 new tax brackets in the Wall Street Journal’s 2022 Tax Guide.

But here’s the kicker. Your long-term capital gains are income and may qualify you for a 3.8% surtax too, especially if you’re a high earner. The 3.8% surtax applies to investment income above an adjusted gross income (AGI) of $200,000. For joint filers, it applies to investment income above an AGI of $250,000. To help visualize this, we included a chart from Michael Kitces’ blog:

As a high earner, it’s just something to be prepared for, especially if you plan to sell stock or another asset you’ve held on to for a long time.

Some States Have a “Workaround” on SALT Caps

The SALT deduction is a hot topic, to say the least. It allows some taxpayers (particularly in high-tax states like New York) to deduct some of their state and local taxes on their federal return.

First of all, it only works for taxpayers who itemize and are from specific states, including New York and New Jersey. In 2017, it also was capped at $10,000 for single and joint filers, and $5,000 for married couples who file separately. Before 2018, taxpayers could deduct 100% of their state and local taxes. So, in higher-tax states, this capped deduction significantly impacted residents.

The SALT cap is set to expire in 2026, when there will be no limit to this deduction—unless Congress makes further changes. Only time will tell. In the meantime, many states, including New York, have provided “workaround’” solutions. One of the most common is a provision for owners of “pass-through” businesses, including partnerships, S Corporations, and LLCs. These businesses usually “pass” profits and losses to owners to handle in their own taxable income.

This workaround provision allows owners of “pass-through” businesses to deduct state taxes from their business income. All they have to do is make sure the business pays taxes at the entity level, so the owner has a smaller amount of taxable income that passes through.

It turns out, business owners in New York are saving billions with this workaround. In fact, pass-through business owners paid $11 billion in state taxes that weren’t limited by the SALT cap. You can read more about the workaround and its impact in the Wall Street Journal’s article from January, 2022.²

At Lake Road Advisors, we know some of these tax guidelines can be difficult to keep up with. If you have questions about your financial circumstances, give us a call, we’re here to help.

SOURCES:

Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN).