What's New for Taxes in 2022

It's already time to start thinking about filing your next tax return. Planning can make the process less stressful and help save you more money. In fact, some tax law changes may reduce your 2022 tax liability.

To guide you through the most significant changes that could impact your taxes next year, we've compiled some essential adjustments and updates for the 2022 tax season.

WHAT’S NEW FOR TAXES IN 2022

While the IRS enacted significant tax breaks in the 2021 tax year, most won't be around for the 2022 tax season. Some popular tax breaks like the child and dependent care credit, expanded earned income tax credit and child tax credit have expired.

Taxpayers should also expect the Inflation Reduction Act to tweak the tax brackets and other adjusted amounts for inflation annually. According to the Congressional Budget Office (CBO)  , this will result in lower marginal tax rates and a higher standard deduction for the 2022 tax year. We’ve listed other updates for the 2022 tax season including the following:

CHILD TAX CREDIT

In 2021, the child tax credit saw significant changes, but they were all temporary. Children ages 6-17 qualified for a $3,000 credit ($3,600 for children five and under), and the IRS allowed the amount to be fully refundable.

The credit will revert to its original structure for the 2022 tax year. The child tax credit will remain at $2,000 per qualifying child, but only $1,500 will be refundable. Low-income earners must have earned an income of at least $2,500 to enjoy the refundable portion of the credit. An age limit of 16 years and below will also be reinstated, making 17-year-old children ineligible for the credit. Lastly,  there will be no monthly advanced credit payments in 2022.

2022 MARGINAL TAX RATES

Under the Inflation Reduction Act 2022, top marginal tax rates remain at 37%. The other marginal tax rates are:

 2022 alternative minimum tax (AMT) exemption amounts will be $75,900 with a phase-out beginning at $539,900 for individuals, while $118,100 with a phase-out beginning at $1,079,800 for married couples filing jointly.

Meanwhile, the 2022 tax year minimum earned income tax credit (EITC) increases to $565 with no children, $3,833 with one child, and $6,935 with two or more children.

2022 STANDARD DEDUCTION RISES

The standard deduction for the 2022 tax year will increase to $12,950 for individuals and $14,700 if you're at the age of 65 years. Married couples filing jointly will have a standard deduction of $25,900 and an additional $1,400 for each spouse that's at least 65 years old. The standard deduction for heads of households will be $19,400 in 2022, with an additional $1,750 if they are at least 65 years old.

INFLATION REDUCTION ACT

The Inflation Reduction Act was signed into law on August 12, 2022. The bill's provisions will significantly reduce the overall tax burden for American taxpayers. The main provisions of the bill are as follows:

Energy tax credit

The home energy tax credit will increase from $500 to $1,200 and, in special cases, $2,000. The credit is available for energy-efficient insulation, windows, doors, furnaces, water heaters, and air conditioners.

Electric Vehicle Tax Credit

The credit for each eligible electric vehicle will be $4,000 (used) and $7,500 (new). However, the vehicle must meet specific criteria to qualify for the credit. For example, the vehicle MSRP must not exceed $55,000 for automatics and $80,000 for SUVs/ Pick-ups.

New minimum tax on corporations

Businesses with an average annual income of over $1 billion will be taxed at a minimum rate of 15%.

Climate and Healthcare Provisions

Many provisions in the bill aim to tackle climate change and improve healthcare. For example, the bill includes a carbon tax on transportation fuels, which is expected to raise $87 billion over ten years. The revenue will fund clean energy initiatives and research.

Other provisions include an increase in the gas tax (from 18.4 cents to 33.4 cents per gallon) and a tax on imported goods (2% on average). The bill will create a new tax credit for employer-sponsored health insurance on healthcare, which should save businesses $148 billion over ten years. The bill will also repeal the "Cadillac tax" on high-cost health plans and increase the funding for Medicaid by $33 billion.

BOTTOM LINE

Understanding the latest tax changes is critical for individuals and businesses. With the Inflation Reduction Act, several significant changes will affect taxpayers in 2022. Seeking the help of a qualified tax professional can ensure you are taking full advantage of the deductions and credits available to you.

Lutz is here to help. We have dedicated professionals who are up to date on the latest tax changes. Contact us if you have questions or learn more about our accounting services.