Your Complete Guide to Tax Credits and Deductions for the 2022 Tax Season

With the new year, the tax season has arrived! It is about the time most American start to consider filing their taxes.

Every year, the tax law changes, and keeping up with them can be challenging for many taxpayers. However, there are important changes that taxpayers must be aware of before they file this year.

Knowing the tax bracket you're in, the limits that could affect you, and the possible deductions are important. It can help you understand your tax liability and make better-informed decisions related to your finances.

By taking advantage of the tax credits and deductions available, you can make the most of your tax benefits, minimize your tax liabilities and maximize your tax savings.

Here are some of the most significant changes that taxpayers should be aware of.

Tax Credits

Child tax credit

The child tax credit reverts from the previously offered amount of up to $3,600 per child under the age of 6 and up to $3,000 per child from aged 6 to 17. For 2022, the child tax credit is up to $2,000 per child under the age of 17.

"Eligibility is based on the child's age, the taxpayer's income, and the taxpayer's filing status," said Michael Chen, Growth Director at Notta.

Child and Dependent Care Credit

The child and dependent care credit help to reduce childcare expenses for children under the age of 13 and adult dependents. For the tax year 2022, it has been limited to $3000 for one qualifying individual and $6000 for multiple qualifying dependents.

Earned income tax credit

Taxpayers with no qualifying children

To claim the earned income tax credit, the age requirement for taxpayers stands at a minimum of 25 years and a maximum of 65 years of age.

Taxpayers can avail of a maximum credit of $560. To avail of the maximum credit, the income requirement for taxpayers is $7,320.

Taxpayers with qualifying children

For taxpayers with one child, the maximum credit available has leveled up to $3,733, with two children, $6,164; and with three or more children, the amount has increased to $6,935.

To claim the maximum tax credit, the earned income requirement is $10,980 with one child and $15,410 with two or more children.

Premium Tax Credit

The premium tax credit helps qualifying Americans with a lower or moderate income purchase health insurance more affordably through the Health Insurance Marketplace.

The Inflation Reduction Act has widened the majority of the premium tax credits through 2025. But the eligibility standards for individuals receiving unemployment benefits have not been extended for 2022.

In the previous year, if you or your spouse, in case of joint filers, received or were authorized to receive unemployment compensation for any week of the year under the American Rescue Plan Act (APRA), you were deemed to satisfy the household income requirements for the premium tax credit for the tax year.

For the 2022 tax year, the law has changed. You must meet all standard eligibility requirements to get unemployment benefits in 2022.

Charitable Deduction

In 2022, getting a charitable deduction is difficult. You may not receive a charitable tax break if you do not itemize deductions on your returns.

Furthermore, taxpayers can benefit only if their itemized deductions and charitable tax breaks exceed their standard deductions.

Form 1099K

Form 1099K is used to disclose revenue from third-party apps. It is applicable for business transactions like part-time work, side jobs, and the sale of goods.

Previously, the requirement was above 200 transactions with an overall amount of over $20,000. For 2022, the requirement to activate the form for taxpayers is only $600.

Income Tax Brackets

"Because of a rapid rise in inflation this past year, the IRS has increased income tax brackets," said Doug Darroch, Managing Partner at Symmetry 50.

The income tax bracket for the year 2022 has been slightly raised, while the income tax rates remain unchanged. It indicates that a more significant portion of your income is taxed at a lower rate.

It may be equal for taxpayers whose income fluctuated in line with the income ranges of the tax bracket. However, if your income and tax withholding had remained static, you can anticipate a larger tax refund or a lower due amount.

Standard Deduction

For 2022, the standard deduction has increased to $12,950 for single taxpayers or married couples filing separately and $25,900 for married couples filing jointly.

The Internal Revenue Service (IRS) has increased the standard deduction up to $19,400 for single household heads, usually unmarried, with one or more dependents.

Charitable Deduction

The "above-the-line" deduction for charitable cash contributions of up to $300 for single tax filers and $600 for married couples filing jointly is not available for the tax year 2022 if you claim the standard deduction.

Although, if you can itemize your deduction, you may be able to claim your charitable deduction.

Retirement Accounts

Although the traditional IRA and Roth contribution limits remain unchanged, the 401(k) contribution limits for 2022 have been raised to $20,500. Taxpayers 50 or older are also eligible to make an additional $6,500 catch-up contribution for this tax year.

AMT exemptions

Alternative minimum tax exemptions for 2022 are $75,900 for single tax filers and $118,100 for married couples filing jointly.

For married couples filing jointly, the phase-out thresholds are $1,079,800; for other taxpayers, the phase-out thresholds are $539,900.

When the AMT income of taxpayers reaches the phase-out thresholds, their AMT exemption starts phasing out at 25 cents on the dollar.

Student Loan Deduction

Taxpayers whose student loan debt is not forgiven or only partially forgiven could be able to deduct up to $2,500 in annual student loan interest. Although if the modified AGI exceeds a certain threshold, the amount of credit may slowly reduce to zero.

Self-Employed Individuals

For 2022, a key dollar threshold for the 20% pass-through income deduction was raised. "This deduction can provide significant tax savings for small businesses and self-employed individuals, so it's important to understand the eligibility requirements and how it might affect your taxes," said Aviad Faruz, CEO of FARUZO.

Self-employed Americans can deduct about 20% of their eligible business income, subject to limits for individuals with taxable incomes exceeding $340,100 for taxpayers filing jointly and $170,050 for other taxpayers.

In addition, self-employed individuals who could not work due to pandemic-related conditions were previously allowed tax credits. However, they have expired for the 2022 tax year.

Adoption

The adoption credit is available for up to $14,890 of qualified expenses in the 2022 tax year.

CleanVehicle Credit

The EV tax credit could have some impact on your tax returns if you bought any electric vehicle in 2022.

Suppose you bought an electric vehicle between August 17 to the end of 2022, but the vehicle is not assembled in North America. In that case, you may not be eligible for the existing credit for purchasing a new electric vehicle.

On the contrary, if you bought a new electric vehicle before August 16 but don't take ownership of the vehicle until August 16 or later, you may claim the credits under the old rules in effect before August 16. In that case, the criteria for the vehicle's final assembly to be in North America is not applicable.

Recovery Rebate Credit

According to tax law changes for the 2022 tax year, there will be no additional stimulus payments. It means that taxpayers may not be able to claim recovery rebate credit.

Changes for the tax year 2023

There are several tax law changes for the 2023 tax year. Having a clear understanding of the changes in tax law for the tax year 2023 can help taxpayers plan and make informed financial decisions.

Here are the highlights.

Tax rates and tax brackets

The Internal Revenue Service (IRS) is making significant changes to many of the income limits that inform the tax brackets for the 2023 tax year.

It implies that some taxpayers may likely stay in a lower tax bracket, and taxpayers with an increased cost of living may avoid having a portion of their earnings moved into a higher tax bracket.

Changes in Standard deduction

The standard deduction for the tax year 2023 will rise by $900 for single and married taxpayers filing separately.

For married couples filing jointly, the amount will rise by $1,800, and $1,400 for heads of households.

Taxes on Capital Gains

The IRS has increased the income thresholds for long-term capital gains for the year 2023.

Earned Income Tax Credit

The earned Income Tax Credit for the year 2023 will increase to a maximum of $7,430 for taxpayers eligible with three or more children.

Gift Tax exemption

The annual gift exemption will rise to $17,000 per person for the tax year 2023.

Estate Tax

Under the lifetime estate tax exemption, estates worth $12.92 million or less will be exempt from estate tax in 2023.

Health Flexible Spending Account (FSA)

From 2023, taxpayers contributing to a health flexible spending account will be able to contribute up to $3,050.

In addition, depending on their plan, they may be able to carry up to $610 into the following tax year.

Adoption

For taxpayers with eligible adoption expenses, the adoption credit will be boosted to the highest of $15,950 in the year 2023.

The preparation of filing taxes can be a hectic and confusing process for many taxpayers. Thus, it is important for taxpayers to be completely prepared and educated about all the necessary tax laws and changes. Being prepared can make the process less stressful and as smooth as possible.

In addition, it may also be an excellent time to hire an accountant or seek advice from tax professionals.

Closing Thought

The changes in tax law imply that more people may end up owing taxes or may get a lesser tax refund compared to the last few years. It is mainly because many tax credits and deductions have been reduced in amount and the requirements for taxpayers to qualify for them.

Before filing for taxes this season, you must collect all the necessary documents and carefully fill out your tax forms.