Well, here we go. The IRS has already started accepting e-filed business tax returns for the 2022 year, and individual returns will be accepted on 1/23/23. In other words, tax season is officially underway.
Thank G-d, this tax season should be a general ‘return to normal’ when compared to the past few years of chaos and legislative changes at the IRS. Between 2020 and 2021, we saw things like PPP loans, Employee Retention Tax Credits, stimulus checks and increased/advanced child tax credits. Those are all a thing of the past now, and your 2022 tax return should be more or less back to the pre-COVID ‘normal’. CPAs all over the country are all breathing a sigh of relief after the past two years.
That being said, there are some changes and updates you should be aware of when getting ready to file your 2022 tax returns. Keep reading below for the most important changes relevant to most people.
Child Tax Credits Return to Pre-2021 Levels
- As part of COVID-related legislation passed in 2021, there was a dramatic change to child tax credits for the 2021 year. The changes included the following four major adjustments:
- Amounts were increased to $3,000 per child over 5, and $3,600 per child under 6 (from $2,000 per child in the past), for all taxpayers under certain income thresholds.
- Dependents under the age of 18 qualified (instead of under 17).
- Most people had half of the child tax credits they were eligible for advanced to them over the months of July-December 2021, and the other half was claimed on the tax return.
- The credits became fully refundable, which meant taxpayers could receive the full amounts of the credits even if they had no taxable tax liability.
- While some Democrats in Congress have pushed to keep these increased benefits for 2022 and in the future, no legislation has been able to be passed to do so. As a result, for 2022 we will return to the pre-COVID normal child tax credits:
- $2,000 per child, for all children under age 17, for taxpayers with AGI up to $400,000 for married filers ($200,000 for all other filers), and only part of the credit is refundable.
Child & Dependent Care Tax Credit Returns to Pre-2021 Levels
- Not to be confused (it often is) with the Child Tax Credit, the Child & Dependent Care Credit is a tax credit for expenses paid to care for young children or certain dependents. The most common example of this is tuition paid to daycare centers so both parents can work.
- Similar to the Child Tax Credits, for 2021 there was unique COVID-related legislation passed that dramatically increased the benefit of the credit, as follows:
- The amount of the credit was increased to up to $4,000 for one dependent and $8,000 for two or more dependents.
- The income threshold to qualify for the full credit was significantly increased – to $125,000 – allowing more taxpayers to claim a larger credit.
- The credits were made fully refundable, so once again even if you had no tax liability, you could claim the credits and get a refund.
- For 2022, we’re back to the pre-2021 amounts and thresholds for the credit. That means the following:
- Maximum credits of up to $1,050 (for one dependent) and $2,100 (for two or more dependents), the income threshold to qualify for the maximum credits is only $15,000 (although you can still qualify for partial credits with significantly higher AGIs), and the credit is not refundable (you must have a tax liability to claim it).
Goodbye to Stimulus Checks
- Most Americans enjoyed three rounds of stimulus checks between 2020-2021.
- For a family of four that met the income thresholds, this meant a total of $11,400 paid out to them over a period of roughly 12 months (April 2020 – March 2021).
- If for whatever reason stimulus checks weren’t received prior to filing tax returns (a common example of this was if you had a new child in 2020 or 2021), then you could ‘reconcile’ your stimulus checks on your 2020 and 2021 tax returns to claim the missing amounts owed to you as a tax credit.
- For 2022 there are no more stimulus checks, which means no more additional tax credits on your tax returns.
Charitable Deductions Only if you Itemize Deductions
- Once again, as part of COVID-related legislation and to encourage donating to charities, in 2020 all taxpayers could deduct up to $300 of contributions to 501c3 charities. In 2021 that number was increased to $600. These were considered ‘above-the-line’ deductions, meaning they reduced your AGI and were available regardless of whether you itemized deductions or not (90% of Americans do not itemize deductions).
- For 2022 this additional charitable deduction no longer exists, and we are back to the pre-2021 normal in which you can deduct charitable contributions only if you itemize deductions.
- The 2022 standard deduction amounts are $25,900 for joint filers, $19,400 for head of household filers, and $12,950 for single filers. For most taxpayers, that means unless your mortgage interest, state & local income taxes & real estate taxes (up to a combined max of $10,000) and charitable contributions exceed those thresholds, you will not itemize and will instead claim the standard deduction. Note that medical expenses can also be claimed as itemized deductions, but they have to exceed relatively high thresholds.
Of course there are other changes to the tax code as well (see our blog post here for interesting changes related to solar panels and EVs), and inflation adjustments to various income thresholds and tax brackets.
However, one main takeaway you should realize from this blog post is that many taxpayers may be in for a bit of a shock when it comes to their 2022 refund amounts (or amounts owed). For the past two years many taxpayers benefited tremendously from the increased child tax credits, child and dependent care credits, and stimulus checks in such a way that it either significantly increased their tax refund when compared to prior years, and/or it reduced balances owed with the return or estimated tax payments. Without the benefit of those increased credits in 2022, most taxpayers’ refunds and/or balances will likely return to pre-COVID norms. So plan ahead in case you were expecting another large influx of cash this spring.
Of course the best way to plan ahead – particularly for business owners with fluctuating income – is to have quarterly tax projections done in order to accurately forecast your tax liability and have it paid throughout the year. Also, with inflation causing a significant increase in IRS interest rates in 2022 and 2023, making accurate quarterly tax payments is more important than ever.
If you’re interested in our quarterly tax planning services, feel free to book an appointment with us here to discuss one of our tax subscription packages!