At the end of 2021, you might have noticed that the IRS made some changes for the next tax season. The IRS is responsible for ensuring taxes are collected and handled correctly and that the system is fair for all. But how can they ensure that everyone is being taxed right and everyone is getting their fair share? By reviewing the tax code and changing any parts that may not be accurate anymore. If a section of the tax code is causing problems, they will discuss it and try to find the best option. This article will cover some of the major changes you might see in the 2022 tax season!
Recovery rebate
The IRS recently announced that individuals who weren’t paid the full amount of their Economic Impact Payment (EIP) in November 2018, or individuals who qualified for the payment but were not paid because they didn’t meet all of the requirements, may be eligible to claim the Recovery Rebate Credit (RRC) when they file their federal income tax returns this year.
The RRC was introduced as part of the Tax Services Cuts and Jobs Act (TCJA) and was made available to qualifying taxpayers in 2018. The TCJA established a 9.8% tax services rate for individuals with adjusted gross incomes (AGI) between $0 and $45,000 and a 12% rate for AGIs above $45,000—both rates are lower than current tax rates.
Mortgage interest deduction cap
The mortgage interest deduction is capped at $750,000 in mortgage debt. For most people, this means they will no longer be able to deduct the interest on their mortgages over $750,000.
The current law allows taxpayers to deduct all the interest paid on their first $1 million in mortgage debt from their income. This new limit is called the “mortgage interest deduction cap.”
Charitable deductions
The 2017 Tax Cuts & Jobs Act created a direct link between the amount of your cash charitable contributions and the amount of your federal income tax reduction. Suppose you don’t itemize deductions on Form 1040, Schedule A. In that case, you can deduct charitable contributions made in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2026, subject to the annual limits.
If you’re not itemizing your deductions on Schedule A because your only deduction is for state and local taxes or interest paid on a home mortgage, then you may be eligible to take a tax deduction for cash contributions up to 60% of your adjusted gross income (AGI) for cash contributions made in taxable years running up to 2025.
Child Tax Credit
Many families will get more money back when they file their tax returns for 2022.
That’s because a new law allows families to claim the Child Tax Credit on their tax returns before the conclusion of the year in which they paid for their children’s qualified expenses.
The IRS is mailing letters to millions of families who paid for their children’s school uniforms, computers, supplies, and other qualified expenses in 2021 and who may be eligible to claim the child tax services credits when they file their tax returns in early 2022.
The IRS will inform families that they need to compare the advance distribution of the tax credit they got in 2021 vs. what they claim in their 2021 tax return. If you received less than the maximum Child Tax credit amounts, you would be able to claim the remainder on their tax return for 2021. People who got more than what they’re eligible for may be forced to repay some or the entire excess payment.
The Employee Retention Tax Credit
Businesses, including those that received PPP loans, will be able to claim employee retention tax credits on their payroll taxes. This deduction is designed to help small businesses offset some of their costs when they retain their qualified employees. Small businesses must employ fewer than 100 full-time equivalent employees to be eligible for this tax credit. The amount of credits you claim here depends on the wages paid to the employee you retain.
Home office deductions
The IRS allows self-employed taxpayers to deduct home office expenses as a business expense if they meet specific requirements. This deduction can save you money on your taxes and give you a leg up on the competition if your business is run out of your home or is a single location. If you work from home or have a home-based business, here are the rules for claiming deductions.
Tangible business property: You must use part of your home exclusively and regularly for business to claim the deduction. Home offices used only occasionally or in conjunction with other activities do not qualify.
You must show that the space is used regularly and exclusively for business purposes. This means keeping detailed records of time spent at home on business activities. Registers and timers can help, but keep in mind that these devices might not always be accurate.
The space must be used more than 50 percent for business purposes. In other words, private time must be less than 50 percent of total time in that space.
Business versus personal expenses: The IRS also expects you to be able to show where your personal expenses end and your business expenses begin.
We recommend that you continue learning about the new tax laws and how they will affect you by visiting the Internal Revenue Service’s website and the American Institute of CPAs. If you have questions or need help with 2022 tax services planning for the future, don’t hesitate to contact us for a consultation at ___. We look forward to assisting you in any way we can!