It’s that point of the year again when we start preparing for the new income tax filing season, which begins on January 23rd. Regardless of whether you are a last-minute filer or you want to get it out of the way immediately, you may be affected by some tax breaks that were in effect in 2021 that may no longer apply to your 2022 income tax fillings.
Let’s say your situation has changed significantly, and you get little to no refund or even owe additional taxes; you don’t need to pay immediately. Kathy Pickering, who is a chief tax officer at H&R Block, says, “File away, and simply state your payment date to be done at April 18th.” Keep in mind paying past that date could incur additional penalties and/or interest.
Why does it seem the refund is smaller this year?
Typically, Americans will overpay taxes throughout the year, and thus they get a nice chunk of change in the form of their tax refund every year after they file. Yet this year, it seems the tax breaks below will expire or change; thus, the refund may end up smaller than expected.
Severance Pay: For those with the misfortune of being let go from their company and they received a large lump sum, that amount is actually taxable. It could also push taxpayers to pay more taxes on parts of their severance pay because it has them going into a different tax bracket. This is similar to how a bonus works.
Pickering also stated that for those that received unemployment, to ensure that taxes were withheld from others, you would have to pay that back.
Deductions for Charity: Typically, if you’re going to claim deductions for charity, you would need to itemize your deductions if the standard deduction of $12,950 (Or $25,900 when filing jointly) wasn’t enough. Previous tax years allowed you to claim beyond the standard deduction when it came to charity deductions meaning you could take the standard deduction plus an additional $300 (or $600 when filing jointly) in deductions. Unfortunately, that is no longer possible.
Earned Income Tax (EITC) without Children: EITC was there to help those making lower incomes, which in 2022 was an income of just under $59,187 per year. EITC is also a refundable tax credit for those without children, but that amount is only $560 for the 2022 tax year, which is nearly one thousand dollars lower than in 2021.
Dependant Care Credit: another one that Congress didn’t push to renew was the tax credit that is there to help working parents pay for childcare. That means less money for working parents that pay for daycare and child care. The 2021 credit was completely refundable – meaning not just to offset income tax, and was at 50% capped at $4,000 for one or $16,000 for two+ people. Yet now, in 2022, it’s down to 35% of all childcare costs. Then the cap is lowered too. For an individual, it’s $3,000. For two people or more, it is capped at $6,000.
Pickering has stated it can knock down thousands of dollars worth of credit and affect the overall refund amount.
Child Tax Credit: The maximum for 2022 is $2000 per child. It qualifies as a child through the age of 16. This credit only applies to those with a modified adjusted gross income below $200,000 or $400,000 if couples file jointly. For those making more, the credit is reduced. For those not owing any federal tax, there’s a cap of $1,500, but with a minimum income needing to be earned of $2,500.
Pickering noted that the previous version of this credit was 100% refundable, with no need for earned income. In addition, the previous child tax credit, which is no longer in effect, allows for a max credit of $3,600 per child below 6 and $3,000 for children between the ages of 6 through 17.
Tips to help with your refund amount, or at the least, reduce your tax burden.
Contribute to your IRA: You should be doing this anyway to help with your retirement. Even with crossing over to the new year, you have until the tax filing due date of April 18th to make contributions for 2022. The limit is $6,000 or $7,000 for those 50+ years older.
Keep in mind that these contributions aren’t always guaranteed deductible. For example, if you’re looking for the maximum deduction, then you and your spouse cannot be covered by a retirement plan from work unless your total modified adjusted gross income is less than or equal to $68,000 or $109,000 when you file jointly.
There’s the possibility of getting a partial deduction if your income is below $78,000 (or $129,000 with your spouse), but if it’s more, there are no deductions. Keep in mind that those employee-sponsored plans, whether retirement plans or 401K plans, typically have other incentives that can also be tax deductible (at the time of contribution) or can be matched up to a certain amount. Therefore, it’s always a good idea to maximize those retirement benefits when possible. It will outweigh any short-term tax payments or burdens in the long term.
Don’t forget about Capital Loss: whenever you sell assets, such as property or stock, but you don’t get a net gain, that’s considered a capital loss. That means you want to make sure you check all your sales, and if you had enough losses, it could offset your gains. That means you won’t need to pay taxes on any gains, and in fact, if the losses were much greater, then you can apply them to reduce your ordinary income up to $3,000 in 2022. Don’t worry; excess losses can be saved for future years.
Start with last year’s return: A good place to start is to see if you want to refile your 2021 tax returns. This amended return is not too late to file and allows you to take advantage of those tax breaks from 2021, Pickering stated.
Your Health Savings Account (HSA) should be maxed out: It’s always a good idea to have an HSA of how expensive medical expenses can get. This is similar to contributing to your IRA. You still have time right up until April 18th filing dates to make it count for 2022.
The current maximum coverage is $3,650 for coverage if you’re single, or if you have coverage for the family, then it goes up to $7,300. If you celebrated your 55th birthday in December of last year, you can add another $1,000 to that figure.
