Now that this year’s tax filing season is over, it’s time to start
thinking about next year’s return. After all, the more tax planning
you do, the more money you may be able to save. But proper tax
planning requires an awareness of what’s new and changed from last
year — and there are plenty of tax law changes and updates for the
2022 tax year that savvy taxpayers need to know about.
Big tax breaks were enacted for the 2021 tax year by the American
Rescue Plan Act, which was signed into law in March 2021. But most of
those tax law changes expired at the end of 2021. As a result, the
child tax credit, child and dependent care credit earned income credit
and other popular tax breaks are different for the 2022 tax year than
they were for 2021. Other 2022 tweaks are the result of new rules or
annual inflation adjustments. But no matter how, when, or why the
changes were made, they can hurt or help your bottom line — so you
need to be ready for them. To help you out, we pulled together a list
of the most important tax law changes and adjustments for 2022 (some
related items are grouped together). Use this information now so you
can hold on to more of your hard-earned cash next year when it’s time
to file your 2022 return.
Child Tax Credit
Major changes were made to the child tax credit for 2021 – but they
were only temporary. The credit amount was increased, the credit was
made fully refundable, for children up to 17 years of age-qualified,
and half the credit amount was paid in advance through monthly
payments from July to December last year. President Biden and
Congressional Democrats tried to extend these enhancements for at
least one more year, but they haven’t been able to get that done so
far (and probably won’t be able to later).
As a result, the child tax credit reverts back to its pre-2021 form
for the 2022 tax year. That means the 2022 credit amount drops back
down to $2,000 per child (it was $3,000 for children 6 to 17 years of
age and $3,600 for children 5 years old and younger for the 2021 tax
year). Children who are 17 years old don’t qualify for the credit this
year, because the former age limit (16 years old) returns. For some
lower-income taxpayers, the 2022 credit is only partially refundable
(up to $1,500 per qualifying child), and they must have earned income
of at least $2,500 to take advantage of the credit’s limited
refundability. And there will be no monthly advance payments of the
credit in 2022.
Child and Dependent Care Tax Credit
Significant improvements were also made to the child and dependent
care credit for 2021. But, again, the changes only applied for one
year.
By way of comparison, the 2021 credit was worth 20% to 50% of up to
$8,000 in eligible expenses for one qualifying child/dependent or
$16,000 for two or more. The percentage decreased as income exceeded
$125,000. When you combine the top percentage and the expense limits,
the maximum credit for 2021 was $4,000 if you had one qualifying
child/dependent (50% of $8,000) or $8,000 if you had more than one
(50% of $16,000). The credit was also fully refundable in 2021.
For 2022, the child and dependent care credit are non-refundable. The
maximum credit percentage also drops from 50% to 35%. Fewer care
expenses are eligible for the credit, too. For 2022, the credit is
only allowed for up to $3,000 in expenses for one child/dependent and
$6,000 for more than one. When the 35% maximum credit percentage is
applied, that puts the top credit for the 2022 tax year at $1,050 (35%
of $3,000) if you have just one child/dependent in your family and
$2,100 (35% of $6,000) if you have more. In addition, the full child
and dependent care credit will only be allowed for families making
less than $15,000 a year in 2022 (instead of $125,000 per year). After
that, the credit starts to phase out.
Earned Income Tax Credit
More workers without qualifying children were able to claim the earned
income tax credit (EITC) on their 2021 tax return, including both
younger and older Americans. The “childless EITC” amounts were higher,
too. However, once again, those enhancements expired at the end of
last year.
Without the 2021 improvements in place, the minimum age for a
childless worker to claim the EITC jumps back up to 25 for 2022 tax
returns (it was 19 in 2021). The maximum age limit (65 years old),
which was eliminated for the 2021 tax year, is also back in play for
2022. The maximum credit available for childless workers also plummets
from $1,502 to $560 for the 2022 tax year. Expanded eligibility rules
for former foster youth and homeless youth that applied for 2021 are
dropped as well. 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.
There are also several inflation-based adjustments that modify the
EITC for the 2022 tax year. For example, the maximum credit amount is
increased from $3,618 to $3,733 for workers with one child, from
$5,980 to $6,164 for workers with two children, and from $6,728 to
$6,935 for workers with three or more children. The earned income
required to claim the maximum EITC has also been adjusted annually for
inflation. For 2022, it’s $10,980 if you have one child ($10,640 for
2021), $15,410 if you have two or more children ($14,950 for 2021),
and $7,320 if you have no children ($7,100 for 2021).
The EITC phase-out ranges are adjusted each year to account for
inflation, too. By 2022, the credit starts to phase out for joint
filers with children if the greater of their adjusted gross income
(AGI) or earned income exceeds $26,260 ($25,470 for 2021). It’s
completely phased out for those taxpayers if their AGI or earned
income is at least $49,622 if they have one child ($48,108 for 2021),
$55,529 if they have two children ($53,865 for 2021), or $59,187 if
they have three or more children ($57,414 for 2021). For other
taxpayers with children, the 2022 phase-out ranges are $20,130 to
$43,492 for people with one child ($19,520 to $42,158 for 2021),
$20,130 to $49,399 for people with two children ($19,520 to $47,915
for 2021), and $20,130 to $53,057 for people with more than two
children ($19,520 to $51,464 for 2021). If you don’t have children,
the 2022 phase-out range is $15,290 to $22,610 for joint filers
($14,820 to $21,920 for 2021) and $9,160 to $16,480 for other people
($8,880 to $15,980 for 2021).
Finally, the limit on a worker’s investment income is increased to
$10,300 ($10,000 for 2021).
Recovery Rebate Credit
Americans were thrilled last March to hear they were getting a third
stimulus check-in in 2021. Those checks were for up to $1,400, plus an
additional $1,400 for each dependent in your family. (Use our Third
Stimulus Check Calculator to see how much money you should have
gotten.) But some people who were eligible for a third-round stimulus
check didn’t receive a payment or got less than what they should have
received. For those people, relief was available in the form of a 2021
tax credit known as the recovery rebate credit.
However, there are no stimulus check payments in 2022. As a result,
there is no recovery rebate credit for the 2022 tax year.
Tax Brackets
Although the tax rates didn’t change, the income tax brackets for 2022
are slightly wider than for 2021. The difference is due to inflation
during the 12-month period from September 2020 to August 2021, which
is used to figure the adjustments.
Long-Term Capital Gains Tax Rates
Tax rates on long-term capital gains (i.e., gains from the sale of
capital assets held for at least one year) and qualified dividends did
not change for 2022. However, the income thresholds to qualify for the
various rates were adjusted for inflation.
In 2022, the 0% rate applies for individual taxpayers with taxable
income up to $41,675 on single returns ($40,400 for 2021), $55,800 for
head-of-household filers ($54,100 for 2021) and $83,350 for joint
returns ($80,800 for 2021).
The 20% rate for 2022 starts at $459,751 for singles ($445,851 for
2021), $488,501 for heads of household ($473,751 for 2021) and
$517,201 for couples filing jointly ($501,601 for 2021).
The 15% rate is for filers with taxable incomes between the 0% and 20%
breakpoints.
The 3.8% surtax on net investment income stays the same for 2022. It
kicks in for single people with modified AGI over $200,000 and for
joint filers with modified AGI over $250,000.
Standard Deduction
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
people can tack on an extra $1,400 to their standard deduction ($1,350
for 2021). That jumps to $1,750 if they’re unmarried and not a
surviving spouse ($1,700 for 2021).
1099-K Forms
Starting with the 2022 tax year, third-party payment settlement
networks (e.g., PayPal and Venmo) will send you a Form 1099-K if you
are paid over $600 during the year for goods or services, regardless
of the number of transactions. Previously, the form was only sent if
you received over $20,000 in gross payments and participated in more
than 200 transactions. The gross amount of payment doesn’t include any
adjustments for credits, cash equivalents, discount amounts, fees,
refunded amounts, or any other amounts.
This change to the reporting threshold means more people than ever
will get a 1099-K form next year that they will use when filling out
their income tax returns for the 2022 tax year. However, remember that
1099-K reporting is only for money received for goods and services. It
doesn’t apply to payments from family and friends.
Charitable Gift Deductions
The “above-the-line” deduction for up to $300 of charitable cash
contributions ($600 for a married couple filing a joint return)
expired at the end of 2021. As a result, it isn’t available for the
2022 tax year (it was available for 2020 and 2021). Only people who
claimed the standard deduction on their tax return (rather than
claiming itemized deductions on Schedule A) were allowed to take this
deduction.
The 2020 and 2021 suspension of the 60%-of-AGI limit on deductions for
cash donations by people who itemize also expired, so the limit is
back in place starting with the 2022 tax year.
Retirement Savings
Here’s some good news for retirees: The IRS updated the table used to
calculate required minimum distributions (RMDs) to account for longer
life expectancies beginning in 2022. That means RMDs should be a bit
smaller starting in 2022 than they were before.
For people who are still saving for retirement, many key dollar limits
on retirement plans and IRAs are higher in 2022. For example, the
maximum contribution limits for 401(k), 403(b), and 457 jump from
$19,500 to $20,500 for 2022, while people born before 1973 can once
again put in $6,500 more as a “catch-up” contribution. The 2022 cap on
contributions to SIMPLE IRAs is $14,000 ($13,500 in 2021), plus an
extra $3,000 for people age 50 and up.
The 2022 contribution limit for traditional IRAs and Roth IRAs stays
steady at $6,000, plus $1,000 as an additional catch-up contribution
for individuals age 50 and up. However, the income ceilings on Roth
IRA contributions went up. Contributions phase out in 2022 at adjusted
gross incomes (AGIs) of $204,000 to $214,000 for couples and $129,000
to $144,000 for singles (up from $198,000 to $208,000 and $125,000 to
$140,000, respectively, for 2021).
Deduction phaseouts for traditional IRAs also start at higher levels
in 2022, from AGIs of $109,000 to $129,000 for couples and $68,000 to
$78,000 for single filers (up from $105,000 to $125,000 and $66,000 to
$76,000 for 2021). If only one spouse is covered by a plan, the
phaseout zone for deducting a contribution for the uncovered spouse
starts at $204,000 of AGI and ends at $214,000 (they were $198,000 and
$208,000 for 2021).
More lower-income people may be able to claim the “saver’s credit” in
2022, too. This tax break can be worth up to $1,000 ($2,000 for joint
filers), but you must contribute to a retirement account and your
adjusted gross income (AGI) must be below a certain threshold to
qualify. For 2022, the income thresholds are $34,000 of adjusted gross
income (AGI) for single filers and married people filing a separate
return ($33,000 for 2021), $68,000 for married couples filing jointly
($66,000 for 2021), and $51,000 for head-of-household filers ($49,500
for 2021).
Teacher Expenses
For the 2022 tax year, teachers and other educators who dig into their
own pockets to buy books, supplies, COVID-19 protective items, and
other materials used in the classroom can deduct up to $300 of these
out-of-pocket expenses ($250 for 2021). The maximum deduction for 2022
jumps to $600 for a married couple filing a joint return if both
spouses are eligible educators – but not more than $300 each.
An “eligible educator” is anyone who is a kindergarten through
12th-grade teacher, instructor, counselor, principal, or aide in a
school for at least 900 hours during a school year. Homeschooling
parents can’t take the deduction.
This is an “above-the-line” deduction. So, you don’t have to itemize
to claim it.
Kiddie Tax
The kiddie tax has less bite in 2022. The first $1,150 of a child’s
unearned income is tax-free if the child is 18 years old or younger,
or a full-time student under 24. The next $1,150 is taxed at the
child’s rate. Any excess over $2,300 is taxed at the parent’s rate.
(For 2021, only the first $1,100 was exempt and the next $1,100 was
taxed at the child’s rate.)
Adoption of a Child
For 2022, the adoption credit can be taken on up to $14,890 of
qualified expenses ($14,440 for 2021). The full credit is available
for a special-needs adoption, even if it costs less. The credit begins
to phase out for filers with modified AGIs over $223,410 and
disappears at $263,410 ($214,520 and $254,520, respectively, for
2021).
The exclusion for company-paid adoption aid was also increased from
$14,440 to $14,890 for 2022.
Bonds Used for Education
The income caps are higher in 2022 for tax-free EE and I bonds used
for education. The exclusion starts phasing out above $128,650 of
modified AGI for couples and $85,800 for others ($124,800 and $83,200
for 2021). It ends at modified AGI of $158,650 and $100,800,
respectively ($154,800 and $98,200 for 2021). The savings bonds must
be redeemed to help pay for tuition and fees for college, graduate
school or vocational school for the taxpayer, spouse or a dependent.
Parking and Transportation Benefits
Employers can provide a little more to their workers in 2022 when it
comes to parking and transportation-related fringe benefits. The 2022
cap on employer-provided tax-free parking goes up from $270 to $280
per month. The 2022 exclusion for mass transit passes and commuter
vans is also $280 ($270 in 2021).
Americans Working Abroad
U.S. taxpayers working abroad have a larger foreign earned income
exclusion in 2022. It jumped from $108,700 for 2021 to $112,000 for
2022. (Taxpayers claim the exclusion on Form 2555.)
The standard ceiling on the foreign housing exclusion is also
increased from $15,218 to $15,680 for 2022 (although overseas workers
in many high-cost locations around the world qualify for a
significantly higher exclusion).
Payroll Taxes
The Social Security annual wage base is $147,000 for 2022 (that’s a
$4,200 hike from 2021). The Social Security tax rate on employers and
employees stays at 6.2%. Both workers and employers continue to pay
the 1.45% Medicare tax on all compensation in 2022, with no cap.
Workers also pay the 0.9% Medicare surtax on 2022 wages and
self-employment income over $200,000 for singles and $250,000 for
couples. The surtax doesn’t hit employers, though.
The nanny tax threshold went up to $2,400 for 2022, which was a $100
increase from 2021.
Standard Mileage Rates
The 2022 standard mileage rate for business driving rose from 56¢ to
58.5¢ a mile. The mileage allowance for medical travel and military
moves also increased from 16¢ to 18¢ a mile in 2022. However, the
charitable driving rate stayed put at 14¢ a mile — it’s fixed by law.
Long-Term Care Insurance Premiums
The limits on deducting long-term care insurance premiums are higher
in 2022 for one age group. Taxpayers who are aged 61 to 70 can deduct
up to $4,510 for 2022, which is a $10 decrease from the 2021 amount.
The 2022 deduction limits for all age groups are the same as the 2021
amounts. Here’s the complete list of limits by age:
40 years old or less = $450
41 to 50 years old = $850
51 to 60 years old = $1,690
61 to 70 years old = $4,510
71 years of age or older = $5,640
For most people, long-term care premiums are medical expenses
deductible only by itemizers on Schedule A. However, self-employed
people can deduct them on Schedule 1 of 1040.
Health Savings Accounts (HSAs)
The annual cap on deductible contributions to health savings accounts
(HSAs) rose in 2022 from $3,600 to $3,650 for self-only coverage and
from $7,200 to $7,300 for family coverage. People born before 1968 can
put in $1,000 more (same as for 2021).
Qualifying insurance policies must limit out-of-pocket costs in 2022
to $14,100 for family health plans ($14,000 in 2021) and $7,050 for
people with individual coverage ($7,000 in 2021). Minimum policy
deductibles remain at $2,800 for families and $1,400 for individuals.
For 2023 HSA-related amounts, see HSA Contribution Limits for 2023 Are Out.
Flexible Spending Accounts (FSAs)
For 2022, the limit on employee contributions to a healthcare flexible
spending account (FSA) is $2,850, which is $100 more than the 2021
limit. If the employer’s plan allows the carryover of unused amounts,
the maximum carryover amount for 2022 is $570 ($550 for 2021).
On the other hand, workers can’t contribute as much to a dependent
care FSA in 2022 as they could in 2021. Last year, as a COVID-relief
measure, a family could sock away up to $10,500 in a dependent care
FSA without paying tax on the contributions. But for 2022, the normal
limit of $5,000-per-year on tax-free contributions applies once again.
Alternative Minimum Tax (AMT)
There’s good news for anyone worried about getting hit with the
alternative minimum tax: AMT exemptions ticked upward for 2022. They
increased from $114,600 to $118,100 for couples and from $73,600 to
$75,900 for single filers and heads of household. The phaseout zones
for the exemptions start at higher income levels for the 2022 tax year
as well — $1,079,800 for couples and $539,900 for singles and
household heads ($1,047,200 and $523,600, respectively, for 2021).
In addition, the 28% AMT tax rate kicks in a bit higher in 2022 —
above $206,100 of alternative minimum taxable income. The rate applied
to AMTI is over $199,900 for 2021.
Tax “Extenders”
There’s a group of tax breaks that are constantly scheduled to expire,
but that keeps getting extended by Congress for another year or two.
These tax breaks are collectively referred to as “tax extenders.”
But so far, Congress hasn’t passed legislation to renew the “tax
extender” deductions and credits that expired at the end of 2021. Most
of the expired tax breaks were for businesses, but the following
expired tax breaks impacted individual taxpayers:
Mortgage insurance premiums deduction;
Health coverage tax credit for medical insurance premiums paid by
certain Trade Adjustment Assistance recipients and people whose
pension plans were taken over by the Pension Benefit Guaranty
Corporation;
Nonbusiness energy property credit for certain energy-saving
improvements to your home (e.g., new energy-efficient windows and
skylights, exterior doors, roofs, insulation, heating and air
conditioning systems, water heaters, etc.);
Fuel cell motor vehicle credit;
Alternative fuel vehicle refueling property credit; and
Two-wheeled plug-in electric vehicle credit.
At some point, lawmakers may swoop in and extend some or all of these
tax breaks once again as they have in the past. They sometimes even
make the extensions retroactive, so the tax breaks listed above could
still be available for the 2022 tax year. We’ll just have to wait and
see what Congress decides to do with these “tax extender” deductions
and credits – stay tuned for future developments.
Self-Employed People
If you’re self-employed, there are a couple of 2022 tax law changes
that could impact your bottom line. First, a key dollar threshold on
the 20% deduction for pass-through income was increased for 2022.
Self-employed people (along with owners of LLCs, S corporations, and
other pass-through entities) can deduct 20% of their qualified
business income, subject to limitations for individuals with taxable
incomes in excess of $340,100 for joint filers and $170,050 for others
($329,800 and $164,900, respectively, for 2021).
Second, tax credits that were allowed for self-employed people who
couldn’t work for a reason that would have entitled them to
pandemic-related sick or family leave if they were an employee have
expired and aren’t available for the 2022 tax year.
Estate & Gift Taxes
The lifetime estate and gift tax exemption for 2022 jumped from $11.7
million to $12.06 million — $24.12 million for couples if portability
is elected by timely filing IRS Form 706 after the death of the
first-to-die spouse.
The special estate tax valuation of real estate also increases for
2022. For the estate of a person dying this year, up to $1.23 million
of farm or business real estate can receive a discount valuation (up
to $1.19 million in 2021), letting the estate value the realty at its
current use instead of fair market value.
More estate tax liability qualifies for an installment payment tax
break, too. If one or more closely held businesses make up greater
than 35% of a 2022 estate, as much as $656,000 of tax can be deferred
and the IRS will charge only 2% interest (up to $636,000 for 2021).
Finally, the annual gift tax exclusion for 2022 rises from $15,000 to
$16,000 per donee. So, you can give up to $16,000 ($32,000 if your
spouse agrees) to each child, grandchild, or any other person in 2022
without having to file a gift tax return or tap your lifetime estate
and gift tax exemption.