The 2022 tax year will bring many tax changes to the Americans. Smart taxpayers will begin planning now.
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It’s now time to think about next year’s tax return. You can save money by doing more tax planning. However, tax planning is only possible if you are aware of the changes that have occurred since last year. There are many tax law updates and tax law changes for 2022 that smart taxpayers should be aware of.
The American Rescue Plan Act was passed into law in March 2021 and provided huge tax breaks for the 2021 tax years. Most of these tax law changes were repealed at the end 2021. The 2022 tax year will see the earned income credit, child tax credit, and child and dependent care credit change. Some 2022 changes are due to annual inflation adjustments or new rules. No matter when, how or why changes were made, they could have a negative or positive impact on your bottom line. You need to be prepared for them. We have compiled a list of important tax law changes for 2022. Some related items are also included. This information will help you save more money next year, when you file your 2022 tax return.
Child Tax Credit
The child tax credit was subject to major changes for 2021. However, these were temporary. The credit amount was increased and the credit was made fully-refundable. Children up to 17 years old were eligible. Half of the credit amount was paid in advance via monthly payments, which ran from July to December 2013. These enhancements were extended for at least one year by President Biden and Congressional Democrats, but they have not been able (and likely won’t) to do so in the future.
The child tax credit will therefore return to its pre-2021 form in the 2022 tax year. The 2022 credit amount is now $2,000 per child. It was $3,000 for children aged 6-17 years and $3,600 to children aged 5 and under for the 2021 tax years. The credit is not available to 17-year-olds this year because the old age limit (16 years) has returned. The 2022 credit is not partially refundable for some taxpayers with lower incomes. They can only claim up to $1,500 per child. In 2022, there will not be any monthly advance payments.
Credit for tax credit for child and dependent care
The child and dependent care credit were also significantly improved for 2021. However, these changes were only effective for one year.
The 2021 credit was comparable in that it could be used to offset up to $8,000 of eligible expenses for one child/dependent, or 20% to 50% for two. As income exceeds $125,000, the percentage decreases. The top percentage combined with the expense limits means that the maximum credit for 2021 is $4,000 if there was one qualifying child/dependent (50% of $8,000), or $8,000 if there were more (50% of $16,000). In 2021, the credit was fully refundable.
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The dependent and child care credit for 2022 is non-refundable. The credit limit percentage drops from 50% to 35%. The credit is not available for care expenses that are less than 50%. The credit can only be used for $3,000 for one dependent child/child in 2022 and $6,000 for multiple children/dependents. The maximum credit percentage of 35% is applied. This means that the top credit for 2022 tax year will be $1,050 (35% off $3,000), if there is only one dependent in your household, and $2,100 (35% off $6,000), if there are more. The full dependent and child care credit will not be available to families earning less than $15,000 per year in 2022, instead of $125,000. The credit will then be phased out.
Earned Income Tax Credit
The earned income credit (EITC), which is available to both older and younger Americans, was more accessible to workers who do not have qualifying children. Also, the “childless EITC” amounts were much higher. These enhancements were also terminated at the close of last year.
The 2021 improvements will mean that the minimum age for a childless worker who wants to claim the EITC goes up to 25 for 2022 tax returns. It was 19 in 2021. For 2022, the maximum age limit of 65 years old was reinstated. The maximum credit that childless workers can receive drops from $1,502 down to $560 in the 2022 tax year. Expanded eligibility rules for homeless youth and former foster youth who applied for 2021 have been dropped. The rule that allows you to use your 2019 earned income for your EITC calculation if it has boosted your credit limit is also no longer in effect. The limit on worker’s investment income has been increased to $10,300 ($10,000 in 2021).
Recovery Rebate Credit
Americans were delighted to learn that they would be receiving a third stimulus package in 2021. These checks could be for as much as $1,400 and an additional $1,400 each for any dependents in your household. To see how much money you should have received, use our Third Stimulus Check Calculator. Some people who were eligible for the third-round stimulus checks didn’t get a payment, or received less than they should have. These people were eligible for a 2021 tax credit, also known as the recovery credit.
In 2022, however, there will not be any stimulus payments. Therefore, the 2022 tax year does not include a recovery credit.
Tax brackets
The tax rates did not change but the income tax brackets in 2022 were slightly higher than those for 2021. This is due to inflation over the 12-month period September 2020-2021. The adjustments are based on this inflation. 2022 Tax Brackets Single/Married Filing jointly/Head Of Household
Long-Term Capital Gains Rates
The tax rates for long-term capital gains, i.e. gains from capital assets that have been held for at least one calendar year, and qualified dividends, did not change in 2022. The income thresholds required to be eligible for the different rates were adjusted for inflation.
Individual taxpayers who have taxable income of up to $41,675 for single returns ($40.400 for 2021), $55,800 if they are head-of-household filers ($54.100 for 2021), and $83,350 jointly for returns ($83,800 in 2021) will be eligible for the 0% tax rate.
For 2022, the 20% rate starts at $459 751 for singles (445,851 in 2021), $488 51 for heads of household (473,751 in 2021), and $517,201 if filing jointly for couples ($501,601 in 2021).
Standard Deduction
To account for inflation, the standard deduction amounts for 2022 were increased. Married couples receive $25,900 ($25.100 for 2021), plus $1.400 for each spouse 65 and older ($1,350 in 2021). Singles can get a $12.950 standard deduction ($12.550 for 2021), and $14.700 for those who are at least 65 years of age ($14.250 for 2021). Head-of-household filers receive $19,400 ($18,800 in 2021) and an additional $1,750 when they turn 65 ($1,700 in 2021). Blind persons can add $1,400 to their standard deduct ($1,350 in 2021). This jumps to $1750 for those who aren’t married and have no surviving spouse ($1,700 in 2021).
1099-K Forms
Beginning with the 2022 tax year third-party payment settlement network (e.g. PayPal and Venmo), will send you a form 1099-K if your total payments for goods or services exceed $600 in the current year. This applies to all transactions. The form used to be sent only if you received more than $20,000 in gross payments or participated in more that 200 transactions. The total amount of a payment does not include adjustments for cash equivalents, credits, discounts, fees or other amounts.
The reporting threshold has been increased to ensure that more people will receive a 1099K form next year. This will be used for their 2022 income tax returns. Remember that 1099-K reporting only applies to money received for goods or services. This does not apply to payments received from family or friends.
Charitable Gift Deductions
At the end of 2021, the “above-the line” deduction of $300 for charitable cash contributions ($600 for married couples filing joint returns) was discontinued. It is no longer available for the 2022 tax years (it was for 2020 and 2021). This deduction was only available to those who claimed the standard deduction on tax returns (rather than itemized deductions on Schedule A).
The 2020 and 2021 suspensions of the 60%-of AGI limit on cash donations by individuals who itemize have also expired. Therefore, the limit will be reinstated starting in 2022 tax year.
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Retirement Savings
Retirees have some good news: The IRS has updated the table that is used to calculate required minimum distributions (RMDs). This was done to take into account longer life expectancies, which began in 2022. This means that RMDs will be slightly lower starting in 2022 than before.
Many key dollar limits for retirement plans and IRAs will be higher in 2022 for those who are still saving for retirement. The maximum contributions to 401(k), 457, and 403(b) increases from $19,500 up to $20,500 in 2022. People born before 1973 are allowed to contribute $6,500 as a “catchup” contribution. The 2022 contribution cap to SIMPLE IRAs will be $14,000 (13,500 in 2021), and $3,000 for those 50 years of age or older.
Teachers’ Expenses
Teachers and other educators can deduct $300 from their out-of-pocket expenses for the 2022 tax year ($250 for the 2021). If both spouses are eligible teachers, the maximum deduction jumps to $600 in 2022 for married couples filing joint returns. However, it is not greater than $300 per person.
A “eligible teacher” is any person who has worked in a school for 900 hours or more during a school year as a kindergarten to 12th grade teacher, counselor, principal, principal, or assistant. The deduction is not available to homeschooling parents.This is an “above the line” deduction. You don’t need to itemize to claim this deduction.
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Kiddie Tax
In 2022, the kiddie tax will have less impact. If the child is under 24 years of age or is a full-time student, the first $1,150 is exempt from tax. The child’s rate is applied to the $1,150 after that. Anything more than $2,300 is subject to tax at the parent’s rates. For 2021, the parent’s rate applies to any excess above $2,300. The first $1,100 is exempt, and the second $1,100 is taxed at the child’s rate.
