Overview: Everything you need to know about the 2022 tax season and your tax return
After the entire world experienced an increase in unemployment and decrease is financial security from 2019 until present, tax season has been more challenging than ever before.
Stimulus checks continue to be released so people are expecting bigger tax refunds, but these economic relief measures likewise create a challenge when it comes to properly filing taxes in 2022. As with last year and the year before, the 2022 tax season has significant changes. Understanding exactly what has changed can help you file your taxes as accurate as possible while avoiding penalties.
Who Has to File a Tax Return?
Most people with income in America are expected to file a tax return. Whether you’re eligible to file a tax or not depends on your total annual or gross income, your age, filing status, and if you’re independent or dependent on someone.
As a general rule, filing a return when your total income is more than the value of your standard deduction, which was $12,550 in 2021, but is elevating to $12,950 in 2022. The income tax limit is $2,700 if you’re over 65.
Tax Deductions, Credits, and What to Consider for 2022
Difference Between Tax Deduction and Tax Credits :
Deductions and Credits are two terms that are often confused because both help to lower your bill and adjust your income. The difference is in how they do it.
Deductions lower your taxable revenue by the percentage of your highest federal income tax bracket. To read in-depth about it, click here. Some assumptions will only be available if you’re itemizing your deductions, while others are still available if you decide to take the standard deduction.
Tax credits reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability while, on the other hand, reducing how much of your income is subject to taxes. This is a dollar amount that’s subtracted from your tax bill. There are two types: refundable and nonrefundable.
When a credit is greater than the amount you owe, and it has a refundable credit, the difference will be paid to you in the form of a refund.
While if it’s a nonrefundable credit, your tax will be reduced to zero, and you won’t receive a refund.
Standard Deductions vs. Itemized Deductions:
You don’t pay tax from your total earnings. The state allows you to knock off a certain amount of your income. Now the income you deduct will be exempt from tax.
However, this is another debate. The principal deduction is the standard deduction for which every citizen is eligible. Your standard deduction highly depends on your filing status. Everyone with that filing status will get the same standard deduction. Except for the seniors or people who are blind, get more. The standard deduction is updated each year and keeps pace with inflation.
These standard deductions will apply to your 2021 taxes if you aren’t filing them until early 2022.
There is also an additional deduction of $1,300 for a couple or married filers-if either person is over age 65 or blind.
In contrast, single filers or the heads of households get an additional $1,650 if they’re of the same status, blind or over 65.
You can claim double the additional deduction if you’re both blind and over 65.
While the itemized deduction includes the amount you pay for state, local income, or personal property, you can choose and itemize your deductions instead of opting for the standard deduction. It works if you spend more than your standard deduction for multiple types of expenses during the year.
Credits You Might Need to Claim In 2022:
Child Tax Credit (CTC):
The child tax is expanded to $3,600 for children under six and $3,000 for children ages 6-17. Rather than waiting for the families to claim their credit, the IRS decided to send the portion of credit as advance monthly payments.
These payments are based on your 2020 taxes. In the meantime, if your income escalated enough in 2021, and you think to start closing in on the phase-out limit, you should consider opting out of advance payments.
If you haven’t received your payment, you can claim your 2021 tax return of your Child Tax Credits that you file in 2022.
To better understand the complexity of the eligibility criteria for the most recent Child Tax Credit, click here. You’ll learn more about how it can affect your taxes, if you qualify to receive it, and the expected amount.
Getting an education during these times has proven a challenge, and the government recognizes this. You should check to see if you’re eligible for the tax break.
The American Opportunity Tax Credit, aka AOTC, offers a partially refundable credit for a student’s educational expenses, specifically for the first four years of college.
Being a student, you can claim up to $2,500, but if the credit brings your liability to zero, 40% will be refunded.
On the other hand, the Lifetime Learning Credit LLC isn’t refundable but covers up to $2,000 in qualified educational expenses. You can take advantage of AOTC in undergrad programs but enjoy the benefits of LLC for all kinds of educational activities – ranging from degree programs to jobs hunting and much more.
Earned Income Tax Credits (EITC):
The EITC is a refundable credit designed to help underprivileged, low, and middle-income households. The bare minimum for a single filer with no children is expected to have $21,430. Meanwhile, the cap for married people with more than three children is $57,400.
However, your filing status depends on your income, the number of children, or family members; these credits will save you a few hundreds or thousands of dollars on taxes.
Interestingly, 1 out of 5 people don’t claim the benefits of their paid taxes or don’t file the tax return request. Don’t let be that you. Learn more about the EITC by checking out this article.
One of the best parts about tax returns is that it’s facilitated in a variety of ways. At the peak of the pandemic, many people became self-employed. If you’re self-employed, there are many deductions you can claim that are specific to business owners.
Some expenses include travel expenses or home office expenses if you’re using a part of your home to conduct your business.
Keep in mind, however, if you’re one of those workers who’s been sent to work from home by your organization, you won’t be able to claim the business deduction.
Did you find yourself with hefty medical bills last year or this year? Unfortunately, many people did. If you fall into this category, you might be able to find some tax relief.
“You can deduct any medical expenses above 7.5% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken.7 For example, if your AGI was $100,000, you could deduct out-of-pocket medical expenses beyond $7,500 in 2021. But you have to itemize your deductions to write off those expenses on your tax return.” Read more about medical deductions here.
Elementary and Secondary School Teacher Expenses:
In 2022, school teachers aren’t left behind either. The teachers can claim $300 paid for the books, computer equipment including the relevant and related software, and other equipment supplementary in the classrooms. It has escalated from $250 2021.
The adoption credit tax for a child will be $14,890 in 2022. The credit phase-out for single taxpayers with Modified Adjusted Gross Income or MAGI with the excess of $223,410 and phased out at $223,410.
Federal State Tax Exemption:
The federal-state tax exemption in 2022 for the dying descendants will increase to $12.6 million, and for a married couple, it’ll be $24.12 million.
The Affects of Covid-19 on Your Taxes
We know many people have lost their jobs and are out of work – whether temporarily or for good. As a result, many have turned to unemployment insurance for help. Although the service was made tax-free in 2018, such isn’t the case in 2021.
If you were unemployed in 2021 and withhold the taxes, it’s time to pay back those benefits.
Paycheck Protection Program:
COVID-19 has affected the world in many unimaginable ways, and every government is playing its role in fixing the rising problems. In this regard, the Economic Security Act tried to help business owners stay afloat by offering them Paycheck Protection Program PPP loans.
With this program, as long as the payments are used for certain business expenses – rent, mortgage payments, utilities, and to name a few – these loans are designed to be forgiven.
In December 2020, the IRS announced that the eligible expenses are paid from the money of PPP loans and deducted from the taxable income, which is good news for the taxpayers. PPP ended in 2021; however, you can get your loan forgiveness application approved by the Small Business Administration.
With the 2022 tax season right around the corner, it’s important you understand what you qualify for and what you can’t claim.
We understand this is a lot of information to take in, but consider it to be your guide to filing taxes this year. You don’t want to miss out on a bigger refund, but you also don’t want to make filing mistakes that’ll cause you a penalty and, as a result, money loss.
If you have more questions, reach out to an accounting firm. We’re happy to provide a free consultation and get all your questions answers, concerns addressed, and taxes filed the right way.