Photo by Kelly Sikkema on Unsplash
Many of us enjoyed the Recovery Rebate Credit and increased Child Tax Credit in 2021, but those pandemic-era tax breaks have gone away for the 2022 tax year.
“That’s a big change,” says Robert W. Jackson, senior tax manager with Apple Growth Partners located in Akron, Beachwood and Canton. “You might be seeing a higher tax bill.”
Jackson offers a primer on changes to be aware of for 2022 taxes that are due April 18, including big breaks expiring and other tweaks made to account for factors like inflation.
Overall Changes
Some changes might have a good impact on your bill, such as income tax brackets that have slightly higher ceilings. For example, the 10 percent tax bracket for singles went up to $9,950 in 2021, but it now goes up to $10,275. It’s likely you might be in the same tax bracket unless you got a big raise.
“Our case here is that rates don’t change, just the bracket size,” Jackson says.
He adds that to account for inflation, the standard deductions were increased. For example, for married filing jointly increased by $800 to $25,900 plus $1,400 for each spouse 65 or older, up $50. For singles, the standard deduction increased by $400 to $12,950 or $14,700 if they’re 65 and older. Higher standard deductions make it a more logical choice for more people.
“The standard deduction is a deduction against your taxes so if that deduction is higher than last year, that’s helping you out,” says Jackson.
Effects on Families
Big child tax credits were a huge win for families for the past tax year. In 2021, the refundable credit was up to $3,600 per kid under 6 and $3,000 per kid up to 17 years old, and half of that could have been paid in advance. Now it’s returned to 2020 amounts, so it’s $2,000 per child up to 16 years old and it’s only partially refundable for some with lower incomes.
“If you have kids, you had some big reductions in 2021,” Jackson says. “There’s benefits you [might] not get in ’22.”
You will get less from the child care and dependent tax credit. In 2021, you could get up to 50 percent back of $8,000 in qualifying child care expenses for one child and $16,000 for two or more for the refundable credit. Now in 2022, you can get 35 percent of $3,000 for qualifying expenses for one child and $6,000 for more than one for the nonrefundable credit. The threshold for those who get the full credit has dropped to just $15,000 annual adjusted gross income before it starts to phase out. Fewer households qualify, but many households can get at least a partial credit.
Contribution Updates
Retirement contribution limits for 401(k)s are up and individual retirement account contribution limits are stable, which is a great thing for those looking to build their accounts. For 2022, individual 401(k) limits have increased a grand to $20,500. And those 50 and older can also do a catchup contribution of an additional $6,500. The total contribution limit, including your employer’s contributions, are up to $61,000 or $67,500 for those over 50. These contributions had to be made by Dec. 31, 2022.
For IRAs, the individual contribution limit is still $6,000 with a catchup contribution of $1,000 for those 50 and over. Individuals have until April 18 to make traditional or Roth IRA contributions for 2022. Traditional IRA contributions may be deductible, depending on the taxpayer or spouse’s participation in an employer retirement plan and their AGI.
Some qualify for a savers’ credit of $1,000 for singles and $2,000 for married jointly filers if you contribute to a retirement account and meet standards that your AGI is not over $34,000.
Either way, Jackson says these new limits are a green light to contribute more to your retirement plans.
“The fact that the limits have increased, people should consider putting more in,” he says.
There are changes to the charitable deduction too. While some enjoyed counting certain charitable cash contributions for 100 percent of their AGI for 2021 charitable deductions, now you can count charitable cash donations for only 60 percent of your AGI for 2022 charitable deductions to most charities. Jackson reminds that you need to keep your receipts for everything you donate. Also for the charitable deduction for 2021, you could deduct $300 for single filers and $600 for married couples filing jointly if you didn’t itemize, but that expired. The charitable deduction is back to only applying for those who itemize. Jackson reminds that you need to keep thorough records of your donations.
“You have to have a receipt from the charity for contributions of $250 or more,” he says. You must get the receipt from the charity by the due date of your return or get an extension. Talk to your adviser about noncash contributions.
Green Living
While some of the energy-saving changes to credits from the Inflation Reduction Act apply to future returns, there are a few effects in place.
“These credits were all around before, but some of them, they extended and renamed,” Jackson says.
For 2022, the renamed residential clean energy credit amount was increased to 30 percent of the cost of installing qualifying electric, water heating or temperature-control systems that use solar, wind, geothermal, biomass or fuel cell power to your home.
The newly renamed energy efficient home improvement credit covers installation of qualified high-efficiency improvements to a home like electric heat pump water heaters, natural gas furnaces, boilers, water heaters, biomass fuel stoves, windows, doors and more. The lifetime limit of the credit is $500 and particular lifetime limits on certain items like $200 for new windows.
A number of changes can affect how taxpayers qualify for the clean vehicle credit. The Inflation Reduction Act requires that a final assembly of a qualifying electric vehicle is in North America for vehicles sold after Aug. 16, 2022. Prior to this date, you can claim the credit without that stipulation. You can look up qualifying vehicles on lists from sources like the U.S. Department of Energy. There are other new requirements for electric vehicles, like a certain percentage of critical minerals in the battery must be extracted or processed in the U.S. or a qualifying country or recycled in North America, and a certain percentage of the vehicle’s battery components must be manufactured or assembled in North America. Both parts of the credit are worth $3,750 but phase out with income limits, and research sources like the U.S. Department of Energy or car dealerships to determine eligibility.
“There are a lot of tools to determine if your vehicle qualifies,” Jackson says.
Navigating taxes is tough. Remember to use e-file and direct deposit for a faster refund by the April 18 due date. And consider getting help to get your best refund.
“Use a CPA if your returns are complicated,” Jackson says.
