Why Taxpayers May Owe More Tax on Their 2022 Returns
Given that many of you are now in the process of engaging for 2022 tax preparation, for this month’s blog I thought it was important to prepare clients for what to potentially expect for 2022, as compared to 2021. There were many tax benefits that were in place for tax year 2021 (due to the Covid-19 pandemic) that are no longer in place for 2022. Legislation to extend those tax benefits did not pass Congress. I will only discuss a few of the most popular benefits that have been reduced or eliminated for 2022 in this article.
Recovery Rebate Credit Has Been Eliminated
The Recovery Rebate Credit (RRC) was in place for tax years 2020 and 2021 and was essentially the tax return version of the stimulus payments that were paid by the US Treasury during the pandemic. Because there were no stimulus payments made during 2022, there will be no tax return version of them on the 2022 return. I would estimate that about a third of my clients received an RRC credit on their 2020 or 2021 returns for a variety of reasons (a new baby, a change in income, alternating dependent exemptions with a former spouse, etc.). So if you received the RRC in 2021, if all other aspects of your return are the same as the previous year, you can expect to owe more tax in 2022 (or receive a smaller refund).
The Child Tax Credit Has Been Reduced to $2,000 Per Child
In 2021 (and only 2021), the child tax credit underwent a highly beneficial expansion that had a massive impact on many of my clients’ returns. For children ages 5 and under, the child tax credit was expanded to $3,600 per child. For children ages 6-17 the child tax credit was expanded to $3,000 per child. For 2022, we are back down to $2,000 per qualifying child. Also for 2022, there were no advance payments of half the child tax credit that many taxpayers received in 2021.
Allowable Child and Dependent Care Expenses Have Been Reduced to a Maximum of $3,000 Per Child/$6,000 for Two or More Children
In 2021 (and only 2021), the child and dependent care credit underwent a massive expansion as well, as taxpayers were allowed a larger amount of qualifying expenses per person than previous tax years. The child and dependent care credit is oftentimes referred to as the “day care credit”, but it can also be used to provide care for aging parents or adult children with disabilities while a taxpayer is working and/or attending college full-time. During 2021 only, the allowable child and dependent care expenses were expanded to cover up to $8,000 in expenses per child (or other qualifying person) or up to $16,000 in expenses for two or more children (or other qualifying persons). The allowable expenses were then multiplied by an amount from 20% to 35% to compute the credit.
For 2022, the maximum allowable expenses for one child (or other qualifying person) are back down to $3,000 per child or $6,000 for two or more children. I was sad to see this benefit go (even though it does not personally benefit me) because of the impact it had on many of my clients’ returns.
The Charitable Contributions Deduction for Taxpayers Who Do Not Itemize Has Been Eliminated
In the tax years since the Tax Cuts & Jobs Act of 2017 doubled the standard deduction, significantly less taxpayers itemize deductions. An unfortunate result of taking the standard deduction (rather than itemizing deductions) is that charitable contributions are not deductible. However, for tax years 2020 and 2021, taxpayers who claimed the standard deduction were eligible for a deduction of up to $300 (or $600 for married filing jointly) for contributions to qualifying charities. This was quite a popular tax benefit, but unfortunately it has expired, and only taxpayers who itemize deductions may deduct charitable contributions on their 2022 returns.
If you receive a surprising result on your tax return for 2022, be sure to consider some of these items I mentioned above. Also if you are a current client whose return I prepared, be sure to look at your “Tax Return Comparison” that shows what changed from year to year that may have impacted your tax liability. Also, for clients who do not like surprise tax balances due at the end of the year, I highly recommend engaging with me mid-way through the year to see if any changes need to be made to the safe harbor tax estimates.
If you are looking for ways to reduce your tax liability to its legal minimum, please contact me regarding a comprehensive tax plan after tax season concludes. Happy tax season everyone!