2022 Tax Law Update

By Tina Talamantes, Enrolled Agent

January 3, 2022

Happy New Year!  I hope your holidays were as beautiful as mine!  We have settled into our new home (after two years) and everything is great!  We had a great summer with our new pool and traveled to Mexico City and Puerto Vallarta.  Natalie and the grandkids are back home from England for good, Joseph is deployed to the U.S. Navy base in Rota, Spain, and is working in the emergency room. James started a new school (Wilton Christian School) and is doing much better without the prior Zoom classes!

Tax Season is here once again, so make sure you schedule an appointment soon.  Email me or text me if you have any questions or wish to make an appointment now.  Here are the latest tax law updates:

1.  The Consolidated Appropriations Act, 2021 

At the end of 2020, the Consolidated Appropriations Act, 2021 was enacted. The package includes many extensions of expiring deductions and credits, extensions, and expansions of certain tax relief provisions provided as part of the response to the COVID pandemic and other disaster tax relief provisions.

The law includes:

• $600 advance payments of a tax credit per taxpayer ($1,200 for married filing jointly) plus $600 for each qualifying child. The credit, like the first stimulus checks, phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly)
• an extension of the ability for businesses to deduct 100% of certain meal expenses
• a clarification that personal protective equipment is a deductible expense for qualified teachers as part of the $250 qualified educator tax deduction
• an extension of the $300 deduction for cash charitable deductions if you claim the standard deduction.  For 2021, the deduction is increased to $600 for joint filers.
• clarification that gross income will not include an amount equal to any forgiven amount of a Paycheck Protection Program (PPP) loan and that expenses paid with forgiven PPP loans are fully deductible

2.  Phaseouts for Deductions and Credits

In line with the adjustments for inflation, many tax deductions and tax credits will have their phaseouts adjusted to account for these changes. Some phaseout changes to note are:

• Earned Income Tax Credit: The maximum credit for filing jointly as a married couple and claiming three or more qualifying dependents amounts to $6,728 in 2021, with the credit completely phased out at $57,414 of adjusted gross income (AGI). If you are a single filer with no dependents, you can receive a maximum credit of $1,502 with your phaseout beginning at $11,610 of AGI
• The Alternative Minimum Tax: Higher exemptions and income phaseouts will occur in 2021.
• IRA contributions: Contribution amounts remain the same in 2021, but phaseout levels for taking deductions for these contributions increase as follows:
• For active participants in employer retirement plans, phaseout for making individual retirement account (IRA) contributions will occur at AGIs between $66,000 and $76,000 for single and head of household filers, $105,000 and $125,000 for joint returns
• For those with IRAs who do not actively participate in another plan but their spouse does, phaseout will now range from $198,000 to $208,000 for those that are married and filing a joint return. For a married individual filing separately, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 to $10,000.
• Phaseouts do not apply if neither the taxpayer nor the spouse has a workplace retirement plan

3.  Child Tax Credit Reconciliation

To reconcile the CTC on your 2021 tax return, filed in the 2022 tax year, you’ll first need to wait for a letter from the IRS, to be sent in January 2022, according to the IRS website.

Letter 6419 will show the total amount of advance credit you received in 2021. Keep this letter with your W-2 form, 1099 forms, and any other paperwork you may need when filing your taxes.

Once you have this letter in hand, you are ready to reconcile the Child Tax Credit as it pertains to your tax return by following these steps:

·         Evaluate your gross income for 2021. If it is less than $112,500 for head of household or $150,000 for married couples filing jointly, you are eligible to receive the full CTC for every child ($250 per child for children between the ages of 6 and 17; $300 per child for children under 6).

·         Calculate the amount of CTC you are eligible to receive based on the number of children and their ages.

·         Review letter 6419 to see if you received the full amount you are eligible for.

 

If the total amount of CTC you are eligible to receive exceeds the amount of your advance credits, you can claim the balance on your 2021 tax returns. It is a fully refundable tax credit, which means that even if you don’t owe the IRS any money, you can collect the credit.

However, if the amount of your advance CTC exceeds what you are eligible to return in Child Tax Credits, you may have to repay some or all of the funds, according to the IRS.

4.  Inflation Adjustments

Income tax brackets, eligibility for certain tax deductions and credits, and the standard deduction will all adjust to reflect inflation.

For most married couples filing jointly, their standard deduction will rise to $25,100. For most single taxpayers and married individuals filing separately, the standard deduction rises to $12,550. Most taxpayers filing as head of household will see their standard deduction increase to $18,800.

5.  Retirement Plan Distributions

Taxpayers should be aware that provisions in the CARES Act allowed individuals impacted by COVID-19 to take out up to $100,000 of retirement funds without incurring the customary 10% early withdrawal penalty. Further, the legislation also loosened requirements for retirees to take required minimum distributions (RMDs) from their retirement plans.

However, this penalty waiver only applies to 2020 unless reenacted by new legislation from Congress.

6.  CARES Act Provision Extended
The CARES Act provided a significant amount of financial relief meant to last only a short amount of time. Some provisions received extensions, though some major components expired in 2020.
Many programs included in the legislation have already expired, though some have been extended after passage of the Consolidated Appropriations Act at the end of 2020.

·         The portion of the act that provided subsidies for employers to offer leave under the Family and Medical Leave Act has been extended to 2025.

On December 22, 2021, the Biden Administration extended the pause on student loan payments, accrual of interest, and delinquency collections through May 1, 2022.