Overview: Americans are facing a long list of tax changes for the 2022 tax year, and smart taxpayers will start planning for them now
If you’re anything like most people, then you likely haven’t thought about taxes since the last time you filed (so at least a few months ago). But we know that proper tax planning involves being aware of what’s changed from the previous tax year, and any upcoming changes we can expect.
In this article, we’re discussing some key changes and updates to the 2022 tax law to help you get a jumpstart on your return. After all, the more tax planning that’s done, the more money that’s able to be saved. We’ll be focusing on tax law changes, tax policy, and new accounting methods for small businesses.
Tax Changes for the 2022 Tax Year
“Big tax breaks were enacted for the 2021 tax year,” says Kiplinger. “But most of those tax law changes expired at the end of 2021.” What has expired, and what can we expect this year?
Most Popular Tax Law Changes
Key insights
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Forty tax provisions affecting individuals and businesses expired in 2021, which could have a significant impact on your tax plan.
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The business interest limitation returned to pre-pandemic levels, though small businesses may qualify for an exception.
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The employee retention credit (ERC) remains available for businesses that had a decline in gross receipts or were shut down due to a government order.
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Companies must now amortize their R&D costs over a five-year period, which may discourage investment in new projects.
The aforementioned insights have been taken from CLA Connect. The child tax credit, child and dependent care credit, earned income credit and other popular tax breaks are different for the 2022 tax year than they were for 2021. Other 2022 tweaks are the result of new rules or annual inflation adjustments.
These changes can hurt or help your bottom line, so you need to be ready for them. Consider the list of the most important tax law changes and adjustments for 2022. Use this information now so you can hold on to more of your hard-earned cash next year when it’s time to file your 2022 return.
The Child Tax Credit (Expired):
According to the article “Expiration Of Child Tax Credits Hits Home,” published by PBS, the monthly tax credits were part of Biden’s $1.9 trillion coronavirus relief package — and the president had proposed extending them for another full year as part of a separate measure focused on economic and social programs. But that clearly didn’t happen.
So why did Congress let one of the most important child poverty policies ever enacted lapse? The answer’s rather simple: there weren’t 50 senators willing to support its extension. And most public reporting suggests the main holdout was Sen. Joe Manchin.
>> Related Reading: Who Killed the Expanded Child Tax Credit?
The impact of stopping the monthly payments was devastatingly swift, according to an assessment from the Columbia Center on Poverty and Social Policy’s monthly tracker. “The effects of the expanded tax credit’s expiration were just as stark as its introduction,” said Vox in their article about the impact of the child tax credit on Americans. “Child poverty increased 41 percent the first month after the credit expired.”
Earned Income Tax Credit (Adjusted) :
The earned income tax credit, or EITC, is aimed at giving low- to moderate-income workers and families a tax break. We talk a bit about the EITC in this blog.
One of the main changes in the credit is the range from $1,502 and $6,728 for the 2021 tax year and from $560 to $6,935 for 2022. So, unlike the Child Tax Credit we previously talked about, at least the EITC is still available for use.
Read more about changes to the EITC here.
Recovery Rebate Credit :
Here’s a message you might’ve been familiar with:
We changed the amount claimed as Recovery Rebate Credit on your tax return. The error was in one or more of the following:The Social Security number of one or more individuals claimed as a qualifying dependent was missing or incomplete.The last name of one or more individuals claimed as a qualifying dependent does not match our records.One or more individuals claimed as a qualifying dependent exceeds the age limit.Your adjusted gross income exceeds $75,000 ($150,000 if married filing jointly, $112,500 if head of household).
The amount was computed incorrectly.
Some people received this “very generic explanation” from the IRS regarding changes to their most recent tax return. One response stated that the most often reason this adjustment is being made is because you already received the rebate.
Employee Retention Credit (ERC):
The Employee Retention Tax Credit (ERC) first began in March 2020 under the CARES Act and is a refundable employment tax credit. This credit helps businesses with the cost of keeping staff employed through the pandemic.
Several changes have been made to the ERC over the past two years, some of which were retroactive for 2020 while others apply only to 2021. With these changes has come a good amount of confusion.
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From March 12, 2020 to before January 1, 2021, employers could claim a refundable tax credit against 50 percent of qualified wages paid, up to $10,000 per eligible employee annually
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The Consolidated Appropriations Act of 2021 extended the credit to wages paid after January 1, 2021, to before June 30, 2021, with some significant changes. Instead of up to $10,000 in wages per employee paid annually, this Act enabled qualified employers to claim a credit against 70 percent of qualified wages paid, with a credit of $10,000 per employee per quarter (for the first two quarters), as opposed to the previous amount of $10,000 per eligible employee annually
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New legislation states that, for the third and fourth quarters of 2021 (wages paid after June 30, 2021, to before Jan. 1, 2022), employers can claim a refundable tax credit of up to 70 percent of the qualified wages paid to employees with a maximum credit of $7,000 per employee per quarter
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The Act was sunset on September 30, 2021, but eligible businesses can still file claims through 2022
For businesses interested in filing for this tax credit, keep in mind that when the Infrastructure Investment and Jobs Act was signed into law in November of 2021, it moved the sunset data for the ERTC to September 30, 2021. However, if your business didn’t file before, you might still be able to apply for stimulus funds based on your financials dating from March 13, 2020 through September 30, 2021.
You can read more details about these changes to the ERC here.
Updates to 2022 Tax Policy
U.S. Tax Policy
The top 2022 tax policy priority for President Biden and most Democrats in Congress is the ongoing effort to enact some version of the House-passed Build Back Better legislation.
The official PWC website explains that this need to secure the support of all 50 Democratic Senators – and the support in particular of Senators Manchin and Sinema – remains the primary obstacle to enacting significant corporate, international and individual tax changes this year.
“The prospect of losing Democratic control of one or both chambers means President Biden and Congressional Democrats face additional pressure to act on their agenda during the current Congress,” says the website.
Global Tax Policy
While policy-making in Washington continues to command C-suite attention, sweeping global tax changes will come into greater focus in 2022. In the wake of last year’s historic political agreement on the Organization for Economic Cooperation and Development’s (OECD) digital tax project, countries will grapple with the task of finalizing and implementing the newly agreed-upon rules, which are scheduled to take effect from 2023.
New Accounting Methods for Small Businesses
The IRS and Treasury released two revenue procedures on Dec. 16, 2021, and Jan. 31, 2022 on accounting method change procedures.
Small business taxpayers are able to obtain automatic consent to change to simplified methods of accounting to comply with the final regulations under specific sections. (Read more about these here.)
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Rev. Proc. 2022-9 modifies existing automatic method changes, adds several new automatic changes, and contains transition rules that provide more flexibility for taxpayers to change to or from the simplified methods.
Procedures also are provided for taxpayers to revoke a syndicate election made under the proposed small business taxpayer regulations issued in August 2020.
As stated in the final regulations, taxpayers that are voluntarily changing their methods of accounting are distinguishable from taxpayers that are required by the Code to change their methods of accounting because they either no longer qualify for the small business taxpayer exemptions or were previously required to change their methods of accounting but subsequently requalify for the small business taxpayer exemptions.
How Prospect Financial Solutions Can Help
As tax laws continue to expire, extend, and evolve, both short- and long-term planning become crucial — as well as flexibility.
Being proactive, personalized, and planned is the key to navigating tax liabilities and identifying new opportunities for savings. Our tax professionals can help you evaluate your options and make informed decisions. Contact us today for more guidance.
