While tax filing season is still three months away, this is the time to start thinking about your 2022 return. There are several tax-law changes and updates taxpayers need to be aware of. Many big federal tax breaks enacted as part of the COVID response expired at the end of 2021, and are unlikely to be extended. The temporary improvements made to the child tax credit, child and dependent care credit, and earned income credit returned to their pre-2021 rules at the end of December 2021.
The 2021 changes to the child tax credit included an increase that was made fully refundable, applied to children up to 17 years of age, and half the credit amount was paid in advance through monthly payments from July to December last year. Again, those changes will applied to 2021. For the 2022 tax return, the credit returns to a non-refundable status.
In 2021, the credit for dependent care expenses (day care costs) allowed up to $8000 in eligible expenses for one qualifying child/dependent ($16,000 for two or more). The maximum tax credit available was 50% of your eligible expenses, if your income was $125,000 or below. Note: people with higher incomes still received some credit, just not the maximum amount. As you prepare your 2022 return, the allowable expenses will drop back to only $3000 for 1 child or $6,000 for more than one child. The full credit, equal to 35% of eligible expenses, will only be allowed for families making less than $15,000 a year in 2022; again, though, families with incomes above that threshold can still receive a tax credit of 20% of eligible expenses.
The “childless” Earned Income Tax Credit enhancements also expired at the end of 2021. To qualify, childless workers must again be between 25 – 64 years old (in 2021 the minimum age was generally 19, and there was no maximum age). In addition, the rule allowing you to use your 2019 earned income to calculate your EITC if it boosted your credit amount no longer applies.
The standard deduction amounts were increased for 2022 to account for inflation.
- Married couples get $25,900 ($25,100 for 2021), plus $1,400 for each spouse age 65 or older ($1,350 for 2021).
- Singles can claim a $12,950 standard deduction ($12,550 for 2021) — $14,700 if they’re at least 65 years old ($14,250 for 2021).
- Head-of-household filers get $19,400 for their standard deduction ($18,800 for 2021), plus an additional $1,750 once they reach age 65 ($1,700 for 2021).
- Blind individuals will have an extra $1,400 to their standard deduction ($1,350 for 2021). That grew to $1,750 if they’re unmarried and not a surviving spouse ($1,700 for 2021).
Avoid being caught by surprise. For 2021, many saw a nice bump in their tax refund check because of the tax breaks created for that year only, and also due to the addition of any stimulus payments that had been missed during the year. Refunds for the 2022 tax year will likely be smaller. Now would be a good time to analyze how the sunsetting of those tax laws will affect your 2022 return. It is not too late to have additional withholdings pulled from your pay checks to ensure you will not owe a great deal when your 2022 return is prepared and filed. To check to see if your withholdings are adequate, use the IRS withholding estimator.