We know how it is. After the joy of the winter holidays, tax season probably isn’t the exciting followup you’re in the mood for. But when you know more about what to expect from the filing process, tax season suddenly becomes a little less stressful. Understanding new changes can help you get better prepared for the process.
Each year, the IRS publishes new standards for taxpayers to follow, and it also creates guidance about the most notable changes that apply to each tax season. For the 2021 and 2022 tax seasons, many taxpayers can expect to owe less and possibly even get back higher tax refunds. Ready to find out which changes might affect your return — and how? Take a look at five of the most significant new tax provisions to learn more.
Throughout 2021, millions of parents received monthly payments from the IRS. These payments were prepaid installments on the Child Tax Credit that parents would’ve otherwise received on their 2022 income tax returns, but they were based on the amount of tax credit each parent would’ve been eligible for according to their 2021 income tax return.
Parents had the choice to opt-out of receiving their credit in advance. If you’re a taxpayer who opted out, you can receive the full tax credit you’re due on the taxes you file for 2022. If you received your full tax credit in the form of advanced payments throughout the year, you won’t get any further Child Tax Credit payments on your 2021 income tax return.
Some parents who receive the tax credit throughout the year may owe money on their taxes to pay some of the prepayment they received back. If your personal circumstances changed between the 2021 and 2022 tax seasons and you longer qualify for the same tax credit, you’ll owe back the difference at tax time. This could happen for several reasons, but most of them aren’t entirely unexpected. For example, your child may have been young enough to earn a credit in 2021 but then aged out of eligibility for you to earn a credit in 2022.
Tax Bracket Changes
When inflation happens, your money doesn’t stretch as far because the cost of goods rises. In response to rising costs and other socioeconomic factors, many jobs have increased wages, even for existing employees, in the past year. Regardless of whether or not you’re earning more, the impact of inflation is that you’ll require more money just to meet your basic needs.
The IRS has made some tax adjustments to account for the high rate of inflation that’s taken place in the past year by increasing the limits for each tax bracket. For example, a single person would have had to earn less than $9,950 in 2021 for all their income to fall into the lowest tax bracket. Now, single people can earn up to $10,275 and remain in the lowest tax bracket. Even for the highest brackets, which includes taxpayers who are taxed at a rate of 37% for income taxes, the upper limit has increased slightly.
The purpose of this change was to make it more likely that a taxpayer who hasn’t had a significant change in their income status will remain in the same tax bracket they were in during the 2021 tax year. This means you can breathe a little easier; there’s less likelihood that inflation-related situations, such as picking up a part-time job to make ends meet or receiving a cost-of-living wage increase at work, will push you into a higher tax bracket.
Higher Standard Deduction Amount
The standard deduction has risen by between $400 and $800, depending on your taxpayer filing status. Married couples filing jointly have the highest increase, bringing their standard deduction to $25,900. This allows you to claim a higher deduction against your taxable income, which decreases your likelihood of falling into a higher tax bracket even if you experience few or no changes in your financial status. Because the standard deduction decrease taxable income, you could save a few hundred dollars in taxes due to this change.
If you choose to — and if it makes more financial sense for you — you can still itemize your deductions. The standard deduction is simply a flat fee that the IRS allows taxpayers to claim, and taxpayers don’t have to prove their qualifying deductions actually equate to the standard deduction’s dollar amount. It’s a freebie, so to speak, where you can claim a certain dollar amount. But if you anticipate being able to deduct a dollar amount that’s higher than the standard deduction, it still makes sense to itemize.
Earned Income Tax Credit Increase
The Earned Income Tax Credit (EITC) has increased. The exact amount of credit you can claim depends on the number of dependents you have, the amount of income you earned and your filing status. Regardless of the circumstance, many taxpayers will be able to claim a slightly higher credit this year.
This can make a difference on your taxes (even if it’s just a few hundred dollars) but you’ll want to be sure you’re eligible for the EITC first. As a tax credit, the amount of EITC that a person has is subtracted from the income dollar amount that they’d otherwise owe in taxes. Taxpayers who don’t owe any taxes and are eligible for an EITC will receive the money back along with any tax refund they’re due. Regardless of a person’s tax situation, the overall impact of an increase in the EITC means more money in taxpayers’ hands.
Higher 401(k) Limits
In 2022, you can contribute $1,000 more during the year to your 401(k). This is a great way to “spend” $1,000 without it being taxed or counting as income until you use it in retirement. That extra $1,000 today should grow to be much more valuable when you’re ready to retire.
While many taxpayers don’t regularly max out their 401(k) contributions, if you’re close to doing so, it’s a good idea to max out the extra $1,000 you can contribute this year. This change incentivizes taxpayers who would usually save money or invest differently to contribute more to their 401(k).
Overall, the average taxpayer will be eligible for more credits and deductions thanks to these changes. But these new provisions could also change your tax strategy. If you’re interested in learning more about the impact these changes could have on your filing, it’s a wise idea to speak with a qualified tax accountant well before your return is due.