It's that time of year again: tax season. Temporary tax relief measures that were provided during the pandemic have expired, so the changes to the tax rules for 2022 are generally unfavorable to many individual taxpayers. That means that you may owe more than you have in recent years. The reason is that many of the tax breaks provided in COVID-19 relief laws have expired. Here are some tax breaks subject to significant changes in 2022.
The American Rescue Plan Act (ARPA) temporarily expanded the child tax credit (CTC) for 2021. Eligible taxpayers were allowed to claim a $3,000 credit for each child ages 6 through 17 at year end, plus a $3,600 credit for each child under 6 — an increase from the usual amount of $2,000 for each child under 17. It also provided for monthly advance payments for half of the credit, from July to December 2021, and made the credit fully refundable in most cases.
The regular $2,000 portion of the credit was subject to a phaseout when modified adjusted gross income (MAGI) exceeded $400,000 for joint filers and $200,000 for other filers. A separate phaseout applied for the extra CTC amount — $75,000 for single filers, $112,500 for heads of household and $150,000 for joint filers.
For 2022, the credit is smaller and available to fewer taxpayers. It drops back to its pre-ARPA maximum of $2,000 per child who's under 17 at year end. As it was before the ARPA, the credit is now partially refundable up to $1,400. It begins to phase out when your MAGI exceeds $200,000 ($400,000 for married couples filing jointly).
The ARPA also temporarily expanded the credit for care for 1) dependents under age 13, or 2) spouses or dependents of any age who are incapable of self-care and living with the taxpayer for more than half of the year. In 2021, you could claim a refundable 50% credit for up to $8,000 in care expenses for one child or dependent and up to $16,000 in expenses for two or more children or dependents. The maximum credit was $4,000 for one child or dependent (50% of $8,000) or $8,000 (50% of $16,000) for two or more children or dependents. The credit began phasing out when adjusted gross income (AGI) exceeded $125,000.
For 2022, you can claim a 35% credit for up to $3,000 in qualifying expenses for one child or dependent and up to $6,000 in expenses for two or more children or dependents. The maximum credit is $1,050 for one child or dependent (35% of $3,000) or $2,100 (35% of $6,000) for two or more children or dependents. The credit is now nonrefundable, and it begins to phase out when AGI exceeds $15,000. The minimum credit percentage is 20% for taxpayers with an AGI exceeding $43,000.
For 2021, charitable contributions could reduce taxes for both itemizers and non-itemizers. Taxpayers who took the standard deduction could also claim an above-the-line deduction of $300 ($600 for married couples filing jointly) for cash contributions to qualified charitable organizations.
The deduction for non-itemizers expired at the end of 2021. In addition, the AGI limit for deductible cash donations by taxpayers who itemize has returned to 60% of AGI for 2022, down from 100% in 2021.
For 2021 only, the ARPA increased the limit on tax-free employer-provided dependent care assistance to $10,500 ($5,250 for married couples filing separately). That was more than twice the 2020 limit of $5,000.
As schools reopened and resumed in-person instruction, the need for full-time child care decreased. So, the exclusion returned to the pre-ARPA level of $5,000 for 2022.
The news on premium tax credits (PTCs) for taxpayers who purchase health insurance coverage through the federal or state marketplaces is mixed. The ARPA increased the availability and the amount of these subsidies. It extended the credits to anyone who received, or was approved to receive, unemployment benefits. It also limited the amount that taxpayers who obtain insurance through a marketplace must pay for premiums to 8.5% of their MAGI, regardless of their income.
The expanded PTCs had been scheduled to sunset at the end of 2022, but the Inflation Reduction Act of 2022 extended the expansion of the credits through 2025. However, PTCs are no longer available to those receiving unemployment benefits.
Changing tax laws, including additional breaks slated to expire in coming years, may make the filing process more complicated and burdensome. We can help you take steps to minimize your income tax liability this year and into the future.
Several states issued taxpayers payments through stimulus or inflation relief programs in 2022. The rules, eligibility requirements and amounts varied greatly between states, and questions have arisen about the taxability of the payments.
These state relief payments may be excludable from income for most taxpayers, the IRS announced. On February 10, the tax agency said that taxpayers in 21 states can exclude from income certain special relief payments they received from their states. However, the rules vary.
In the following states, payments made for general welfare or for disaster relief are excludable: AK, CA, CO, CT, DE, FL, HI, ID, IL, IN, ME, NJ, NM, NY, OR, PA and RI. For taxpayers in AK, the exclusion applies only to supplemental energy relief payments received. In addition, taxpayers in GA, MA, SC and VA must meet certain requirements in order to exclude state relief from income.
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