Hi everyone, Katie here.

As I write this article, I am looking at the date on the calendar and finding it hard to believe I am already talking about the next filing season. However, it is the perfect time to start thinking about how your year is going so far and prepping for any upcoming tax changes. That way, you have the opportunity to do more tax planning, and with more tax planning comes more tax savings! To kick off this planning, check out this breakdown of some important tax updates to consider while planning for the 2022 tax year.

1) Child Tax Credit & Child/Dependent Care Credit

In 2021, major changes were made to the Child Tax Credit (CTC) & Dependent Care Credit to support families during the pandemic. The CTC was increased, made fully refundable, children up to 17 years of age qualified, and half of the credit amount was paid in advance through monthly payments. In addition, the 2021 credit for Dependent Care was worth 20-50% of up to $8,000 in eligible expenses for one qualifying child/dependent or $16,000 for two or more and was also fully refundable. For 2022, these credits will return to their pre-2021 limits & taxpayers want to ensure they are prepared for this.

For the CTC in 2022, the credit amount decreases back down to $2,000/child, children who are 17 would not qualify, and it may only be partially refundable depending on earned income. There will also be no monthly advanced payments. For the Child/Dependent Care Credit in 2022, it is non-refundable, the maximum credit percentage drops from 50% to 35%, and the limit for eligible expenses drops to $3,000 for one child/dependent and $6,000 for more than one.

2) Earned Income Credit

The Earned Income Credit (EIC) was also modified in 2021 to increase taxpayer savings during the pandemic. More workers without qualifying children were able to claim the credit and the amount of the credit was higher, but like the CTC and Dependent Care Credit, these enhancements expired at the end of 2021.

In 2022, the minimum age to claim the EIC for a childless worker will return to 25, and the maximum age limit to claim the credit of 65 will be reinstated. The maximum credit available for childless workers also drops from $1,502 to $560 for the 2022 filing year, and the rule allowing you to use your 2019 earned income to calculate your EIC if it boosted the credit no longer applies. If you were able to claim this credit in 2021, ensure you check out your qualifications to see if you will still be eligible in 2022!

3) Standard Deduction

The amounts for the standard deductions are updated periodically to account for inflation. In 2022, standard deduction limits are being increased as follows:

• Single filer or married filing separately, under 65 – $12,950
• Single filer or married filing separately, 65 or over – $14,700
• Married filing jointly, under 65 – $25,900
• Married filing jointly, 65 or over – plus $1,400 for each spouse 65 or over
• Qualifying widower – $25,900 (additional $1,400 if 65 or over)
• Head of Household, under 65 – $19,400
• Head of Household, 65 or over – $21,150
• Blind tax filers who are married or qualifying widowers – $1,400
• Blind tax filers who are unmarried and not a qualifying widower – $1,750

These amounts are deducted from your adjusted gross income and decrease your total tax liability for the year.

4) 1099-K Forms

Remember all of that scary talk about the IRS coming for your Venmo? This tax update is what that relates to. Starting with the 2022 tax year, third-party payment settlement networks (like Venmo, Zelle, and PayPal) will send you a Form 1099-K if you are paid over $600 during the year for goods or services.

Before, this form was only sent if you received over $20,000 in gross payments and participated in more than 200 transactions, but the new ruling eliminates that transaction threshold as well. Before you freak out and stop all of your friends from sending you money for last night’s dinner, this only applies to those using these platforms for business transactions. Personal payments from family & friends will not be reported or taxable.

TIP FOR BUSINESS OWNERS: If you are still co-mingling business/personal transactions with your third-party payment processors, this is your sign to STOP immediately. Continuing to do this runs the risk of overstating your reported income and increases the difficulty of separating these transactions for financial clarity. Any third-party payment processing accounts linked to your business should be for business-related transactions only.

5) Charitable Donations

If you typically claim the standard deduction but make qualified charitable cash donations, you may have found yourself able to claim $300-$600 in credits to your adjusted gross income.

Unfortunately, this was only allowable in 2020-2021, and in 2022 this is no longer available for standard deduction claimants. Moving forward, only those itemizing their deductions will be able to claim a credit for charitable donations.

6) Adoption Costs

To adjust for inflation and to continue incentivizing adoption, the adoption credit for qualified expenses & exclusions for company-paid adoption aid has been increased for 2022. The adoption credit can be taken on up to $14,890 of qualified expenses or fully for a special-needs adoption. The credit begins to phase out for filers with modified adjusted gross incomes over $223,410 and is fully phased out after $263,410. The exclusion for company-paid adoption aid is also increased to $14,890.

7) Educator Expenses

Teachers and other educators will be relieved to see that the amount that they can deduct for out-of-pocket expenses they make to improve their classrooms is being increased for 2022. Purchases for books, supplies, COVID-19 protective items, and other materials up to the limit of $300 ($600 for married educators) are allowable for a deduction. 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. Unfortunately, this deduction is not eligible for homeschooling expenses.

7) Estate & Gift Taxes

The lifetime estate and gift tax exemption for 2022 was increased significantly from $11.7 million to $12.06 million ($24.12 million for couples if portability is elected by filing IRS Form 706 after the death of the first-to-die spouse). Also, the deadline for electing portability is extended from two years to five years for smaller estates that are not required to file Form 706 because their assets don’t exceed the exemption amount. In addition, the annual gift tax exclusion for 2022 increases from $15,000 to $16,000 per donee. Meaning you can give up to $16,000 (or $32,000 for married couples) in gifts without having to file a gift tax return in 2022.

9) Payroll Taxes

While this is one of the more seemingly insignificant of the tax updates, it is probably the one that affects the most taxpayers. For 2022, the Social Security annual wage base is being increased to $147,000. This increases the amount of taxable Social Security wages and thus the amount collected in Social Security tax (rate holding steady at 6.2%). Both workers and employers continue to pay the 1.45% Medicare tax on all compensation in 2022 with no cap. Workers will also pay the 0.9% Medicare surtax on 2022 wages and self-employment income over $200,000 for singles and $250,000 for couples. This surtax does not affect employers. Read more about these updates here.

10) Self-Employed Individuals

There are a few 2022 tax law changes that could affect self-employed individuals and business owners. The first is an increase on the threshold amount for the 20% deduction for pass-through income for solo entrepreneurs (including owners of LLCs, S-Corps, and other pass-through entities). This is subject to limitations for individuals with taxable incomes in excess of $340,100 for joint filers and $170,050 for others. In addition, tax credits that were allowed for self-employed people affected by the pandemic (like deferral of self-employment tax or sick/family leave) are not available in 2022.

Also, keep in mind that deferred amounts from 2020 are due by the end of 2022!

This is not a comprehensive list of the 2022 tax updates, but they are the ones we found most relevant to our client base. If you are wondering how one or more of these changes will affect you, do not waste any time getting in touch with your tax preparer! There is still plenty of time left in the year to prepare and adjust.

Happy tax planning,

Katie @ The Gallo Group

P.S. We are taking new clients for 2022 tax work! Whether you are a business owner or an individual looking to build a relationship with a professional, we are here to help. Go here to get in touch with us! We are looking forward to connecting with you.