In with the new, out with the old. On the tax front, this means COVID-19 relief measures that formerly helped to lift some of the burden from your tax bill, are making way for responses to yet another source of volatility in the form of “most-watched” annual inflation adjustments and Inflation Reduction Act-oriented credits.
A return to “normalcy”
Many of the individual credit and deduction items that we may have become accustomed to in the pandemic fallout are subsiding, which could result in less refund monies or a greater balance due to Uncle Sam in an environment of fewer refundable credits. Formerly, the enhanced Child Tax Credit was fully refundable and went from $2K (for each eligible child) to $3,600 and $3K for children aged six and under, and children up to 17, respectively.
As provisions from the American Rescue Plan phase out, this credit will go back to the “non-refundable,” pre-pandemic “norm,” and will again sit at $2K for qualifying children regardless of age (though those qualifying must be dependents under aged 16 and not up to 17). Plus, filers are not eligible to get some of that credit as an “advance,” another departure from year-prior provisions.
Additionally, for those who do not have such qualifying dependent children, the EITC (Earned Income Tax Credit) took a hit in 2022. As an example, qualifying taxpayers whose EITC was just north of $1500 will find it cut by more than half (to less than $600) in the current tax year.
Another nod to the “new,” (or at least the “newer”), such credits for those with qualifying children who are filing will see a slight increase in the EITC amount. This slight boost was designed in response to inflation and cost of living increases. For those filers who are paying for carers for either children (or others who are recognized as “dependents”) while they work, the maximums for the “Child and Dependent Care” credit have plunged between tax years ’21 and ’22. More information on this benefit can be found here.
Regardless of changes, it is still worth looking into the EITC. The IRS reports that many filers who fall within income guidelines leave money on the table, as a reported one in five taxpayers do not account for this credit, and may not even be aware that they are eligible. In fact, utilization of this credit has historically been so low since it debuted in 1975 that the IRS established its own EITC-specific awareness day in January.
You may also recall how, with the passage of ARP, filers could take both the “standard” and claim an additional deduction on the amount that was donated to charitable organizations. The deductions were limited to $300 (for singles) and $600 (for married couples-joint filers). For 2022, wave goodbye to this deduction. The ability to claim the deduction in the current tax year is now limited to those who itemized.
The more things change, the more they stay the same. So, some deductions remained unchanged (albeit not enhanced) for tax year 2022. These include:
State/local sales, income and property tax deductions remain with a ceiling of $10K ($5,000 for those who are married, but separate filers)
Interest used to purchase, construct or improve on residential property continues to be deductible up to $750K ($375,000 when married taxpayers do not file jointly)
“Miscellany” deductions in excess of 2% of one’s AGI remain obsolete, as they have since the Tax Credit and Jobs Act (TCJA), which means that there continues to be no work-from-home exceptions as the result of changes in the post-COVID-19 environment.
Additionally, in another nod to the TCJA, the personal exemption stands at zero – as it has for tax years 2018 and will remain as such for an additional three tax years (‘til 2025).
Depending on your unique situation, filing status, income requirements and other factors that we are happy to discuss with you at greater length, it may be worth looking into deductions for:
Educators’ expenses, such as unreimbursed materials used in the classroom (supplies, equipment, etc)
Costs related to medical and dental care, for one’s self, spouse, and dependents (total expenses must exceed 7.5% of AGI)
For the “self-employed,” there are more than a dozen available deductions and credits, which are as nuanced as the employees and employment itself; for instance, those “gig-workers” who drive for ride-sharing providers are eligible to deduct both mileage as well as expenses related to “upkeep” (registration, fuel, oil changes)
There are also ~dozen breaks related to qualifying expenses for education and notables span the American Opportunity Credit and Lifetime Learning Credit for higher education. Respective rundowns for each and a handy comparison tool can be found here.
In the above vein, some taxpayers with outstanding student loan debt may still be eligible to deduct qualifying interest on said loans despite the Department of Education hitting the “pause button” on payments (again, as part of COVID-19 emergency relief)
“In” with inflation-related adjustments
Late last year, the IRS announced inflation adjustments for returns being filed this year and as we speak. While the agency makes these adjustments every year to account for the cost of living (in fact, they are technically “Cost of Living Adjustments” or “COLA”), they are a headliner this year as is everything with the seemingly omnipresent “I” word.
The standard deduction rose by $400 to $12,950 for individuals (separate filers) and married couples (filing separately), and increased by $600 among those heads of households (to $19,400). Likewise, married couples-joint filers will notice an increase of $800 to $25,900 for tax year 2022.
For a full list of tax highlights, including on marginal rates for 2022, check out the inflation adjustments announcement from the IRS here. After all, there are more than 60 provisions that are subject to such adjustments. It should also be noted that considerably greater increases are on the horizon for tax year 2023; for instance, the standard deduction is reportedly rising by $900 for individual filers (to $13,850), by $1,400 for “heads of households” (to $20,800) and by $1,800 for married-joint filers (to $27,700).
As we discussed previously, tax year 2023 is also ushering in new credits and deductions courtesy of the Inflation Reduction Act. Notables include:
Used “clean” vehicles – If you buy a qualifying used vehicle, a credit up to $4,000 or 30% of the sales price (whichever amount is less) could be all yours.
New “clean” vehicles – Incentives related to sustainability-oriented investments also span brand-new quality electric vehicles (with credits of up to $7,500) and with the built-in added bonus of saving money on gas!
Home improvement credits – These breaks are focused on efficiency-garnering upgrades to electric panels, new windows, insulation, and their ilk. Qualifying purchases are capped at $1,200 (subject to limits on a “per item” basis).
Household “clean energy” investments and, accordingly, credits – These span everything from biomass stoves to heat pumps, and solar panels to solar water heaters (up to 30% of the costs, depending on the specific type of credit that you are after and that your purchase may be eligible for).
Additionally, and well underway, the IRS has bolstered its resources this tax season. With more staffing power, again courtesy of the Inflation Reduction Act, the prognosticator-types tell us to, naturally, brace for greater audit risk. Of course, when partnering with our professional staff, there is considerable peace of mind. Your tax returns will be filed accurately, completely and in a timely fashion. Plus, we are available to answer any questions and address any concerns that might otherwise keep you up at night. As we’ve said before; taxes are not just a “season” to us. They are a year-round commitment to our valued client-partners. Likewise, taxes need not be taxing. They can represent considerable opportunities to keep more money in your pocket and to get good clarity on an otherwise cloudy or murky financial picture.