2022 Tax Changes you Should Know to Help you Plan your Taxes
The transition from several COVID tax incentives to now, where inflation is the new elephant in the room, brought a barrage of tax changes we should prepare for. Given such a phenomenon, tax planning becomes a key tool to ensure that you do not end up paying far more taxes than you could ever anticipate. Therefore, the need for tax planning is the number one reason you should know about these tax changes in 2022. However, please note that this article focuses on other tax changes that are not the usual annual inflation adjustments.
What are notable tax changes between tax years 2021 and 2022?
- No more Advance Child Tax Credit
In 2021, the government increased the Child Tax Credit (CTC) to $3,000 for each child under age 18 or $3,600 for each child under age 6. The credit was fully refundable. Parents received monthly Advanced CTC payments for half this amount between July and December 2021. They then claimed the remainder when they filed their 2021 returns. This was meant to provide relief to parents against COVID-19 economic challenges.
However, in 2022, this package was not renewed and is now partially refundable. Instead, taxpayers should expect the usual $2,000 for each qualifying child under the age of 17. And there will be no monthly payments in 2022.
- Changes to the child and dependent care credit.
The child and dependent care credit will also revert to pre-2021 tax year amounts. Temporary increases applied to the 2021 tax year were also meant for pandemic-relate relief.
In 2021, the credit was increased to be worth 20% to 50% in eligible expenses, up to $8,000 for one qualifying child or dependent ($16,000 for two or more). The phase-out amount started at $125,000. It was also fully refundable for 2021.
But in 2022, the child and dependent care credit will no longer be fully refundable. It will also revert to a maximum of 35% in eligible expenses. The credit is only allowed for up to $3,000 in expenses for one child or dependent and $6,000 for more than one. Please take note of all these changes when you plan your taxes in 2022.
- Changes to the earned income tax credit (EITC)
In 2021, several workers without qualifying children could claim the EITC. This applied to both young (from 19 years) and older (more than 65 years) taxpayers who gladly claimed this on their 2021 tax returns. The maximum credit available for childless workers also increased to $1,502. However, in 2022, we reverted to pre-2021 levels because this adjustment expired at the end of 2021.
The minimum age for a childless worker to claim the EITC reverts to 25 for 2022 tax returns. More so, the maximum age limit is back at 65 years old. It was eliminated for the 2021 tax year. Childless workers expect to claim a maximum of $560 for the 2022 tax year. There are more changes to this credit. If you were its beneficiary last year, it would help to consult a tax professional before preparing your 2022 tax return. If you want me to help you in this regard, contact me to book a quick tax chat.
- Schedule K-2 and K-3 changes for partnerships or S corporations
Earlier in the year, IRS posted new guidance requiring domestic partnerships and S Corps without foreign transactions or assets to prepare schedules K-2 and K-3.
Suppose a partner or shareholder files Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), or f a partner or shareholder files Form 1118, Foreign Tax Credit. In that case, corporations, the partnership, or an S Corp now must file Schedules K-2 and K-3, even if it has no foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued.
What does this mean?
This announcement meant more complexity in preparing taxes for affected parties. We have been entertaining inquiries from affected parties, and I am happy to say that we can assist your business if you are affected by these changes. If you were thinking of filing your own returns, thinking your business is small enough, you may want to reconsider that. Hiring a tax pro is the easiest way to deal with this complexity. It is more important even now because not only do companies with international transactions file Schedules K-2 and K-3 this time, but those without any foreign assets, transactions, and sources of income may also need to file.
Conclusion
We expect more tax changes to come this year. This is because of the ongoing process with the budget reconciliation bill meant to replace the stalled Build Back Better Agenda. It contains proposed tax changes that can affect Pass-Through-Entities (PTEs) and large corporations. PTEs may be required to pay 3.8% in additional taxes, while large corporations are facing a proposed minimum 15% tax. To stay in touch with ongoing tax changes and more updates and tips about running your business, follow my social media pages and subscribe to my mailing list. You can also talk to me about tax planning services.
Frequently Asked Questions
- What is the new tax increase for 2022?
The 2022 most significant tax increase would affect the rich. If passed, the new budget reconciliation bill could see corporates paying a minimum of 15% in taxes. Partnerships and S-Corporations could also pay an additional 3.8% in taxes.
- Will there be a 2022 tax return?
Yes, taxpayers and corporates must file a tax return annually. The 2022 tax returns will be filed starting in January 2023 to the April 15 traditional deadline. Tax professionals are already doing tax planning for their clients and implementing strategies to reduce their clients’ tax bills when they file.
- What is the tax year 2022?
The tax year 2022 began on January 1, 2022, and will end on December 31, 2022. You will file a tax return for this year towards the end of January 2023. The deadline to file is April 15, 2023, unless the IRS announces changes due to extreme weather or an epidemic, etc.
- How much should I get back in taxes in 2022?
Taxpayers may get a refund after filing their taxes. A refund amount depends on various factors. One is how much you overpaid in taxes during the tax year you are filing a return for. For example, if you overpaid withholding taxes by $200, that’s what you get as a refund – but that’s your money. You can, however, get more money as a refund by applying tax-saving strategies that result in more deductions and refundable credits.
