With the top of the yr quickly approaching, now is a superb time to get organized for tax season. Although your federal tax returns aren’t due till April 18, 2023, there have been quite a lot of modifications over the previous yr that would affect your tax refund. And, in the event you began a facet hustle or freelance gig, you could discover you owe taxes this yr.
Many of the pandemic tax advantages from the previous few years, like the expanded baby tax credit score, baby and dependent care credit score and stimulus funds ended on the finish of 2021, which may imply your refund might be just a little smaller this yr.
When it involves taxes, 2022 is the yr of the nice reset, stated Mark Steber, chief tax info officer for Jackson Hewitt. “A whole lot of issues that have been put into place for 2021, and a few half 2020, will revert again to pre-pandemic years, which might result in refund shock or, extra importantly, balance-due shock.”
In addition, some new rules have been put into place. Third-party fee apps like PayPal, CashApp and Venmo will now be reporting cash earned by freelancers all year long to the IRS. Student mortgage forgiveness — if handed — is exempt from federal taxation, however borrowers in some states might owe taxes. And lastly, in the event you had any crypto exercise previously yr, the IRS desires to learn about it.
There’s lots to cowl, so we’ll stroll you thru probably the most vital tax modifications to organize for this upcoming tax season.
1. The normal deduction for 2022 is larger
It’s typical for the normal deduction to extend just a little every year, together with the speed of inflation. For your 2022 tax return, the usual deduction for single tax filers has been elevated to $12,950 (up by $400), and has been bumped to $25,900 for these married submitting collectively (up by $800).
The normal deduction is what most taxpayers with easy tax returns declare to cut back their taxable revenue. If you obtain a standard paycheck by an employer and are not eligible for a lot of particular deductions or credit, the usual deduction seemingly is sensible for you. If you will have bills or particular person deductions you’d slightly declare, like self-employment tax breaks, you wouldn’t declare the usual deduction.
2. Income tax brackets for this yr have been raised
For 2022, revenue tax brackets have been additionally raised to account for inflation. Your revenue bracket refers to how a lot tax you owe primarily based in your adjusted gross revenue, which is the cash you make earlier than taxes are taken out, excluding itemized exemptions and tax deductions.
While the modifications have been slight, in the event you have been on the backside of a better tax bracket in 2021, you will have bumped all the way down to a decrease price on your 2022 tax return.
2022 tax brackets for single filers
| Taxable revenue | Federal tax price |
|---|---|
| $10,275 or much less | 10% |
| $10,276 – $41,775 | $1,027.50 plus 12% of revenue over $10,275 |
| $41,776 – $89,075 | $4,807.50 plus 22% of revenue over $41,775 |
| $89,076 – $170,050 | $15,213.50 plus 24% of revenue over $89,075 |
| $170,051 – $215,950 | $34,647.50 plus 32% of revenue over $170,050 |
| $215,951 – $539,900 | $49,335.50 plus 35% of revenue over $215,950 |
| $539,901 or extra | $162,718 plus 37% of revenue over $539,900 |
2022 tax brackets for taxpayers who’re married, submitting collectively
| Taxable revenue | Federal tax price |
|---|---|
| $20,550 or much less | 10% |
| $20,551 – $83,550 | $2,055 plus 12% of revenue over $20,550 |
| $83,551 – $178,150 | $9,615 plus 22% of revenue over $83,550 |
| $178,151 – $340,100 | $30,427 plus 24% of revenue over $178,150 |
| $340,101 – $431,900 | $69,295 plus 32% of revenue over $340,100 |
| $431,901 – $647,850 | $98,671 plus 35% of revenue over $431,900 |
| $647,851 or extra | $174,253.50 plus 37% of revenue over $647,850 |
3. The expanded baby tax credit score advantages have been reset
While 2021 had a non permanent growth of the kid tax credit score, together with eligibility for extra dependent kids and providing advance funds, that is not the case on your 2022 taxes.
The CTC has dropped again all the way down to its pre-pandemic quantity — $2,000 per baby or dependent — and is now solely out there for kids below 17 years of age. The credit score, which was totally refundable final yr, is now solely partially refundable to some lower-income mother and father, and advance funds are not in impact. (Partially refundable means you’ll be able to solely obtain a portion of this credit score as a refund, although the complete quantity will be utilized to your tax invoice.)
That stated, it is best to nonetheless declare the CTC in 2022 if eligible — it may well assist enhance your refund or might assist offset a tax invoice. And, whereas federal advantages have decreased, some states are providing baby tax credit score advantages this yr and subsequent.
4. Fewer filers will qualify for the Child Care and Dependent Tax Credit
In 2021, the Child Care and Dependent Tax Credit additionally acquired non permanent expansions, permitting those that made $125,000 or much less to deduct between 20% to 50% of $4,000 (or $8,000 for folks with a couple of baby) in qualifying baby care bills. It was additionally refundable.
For 2022, this tax break has additionally reverted again to what it was in 2020. Now, mother and father with one baby can solely declare as much as 35% of a most of $3,000 in qualifying bills, for a most quantity of $1,050. Parents with a couple of baby are eligible for up 35% of as much as $6,000 in qualifying bills, for a most quantity of $2,100.
The largest distinction is the revenue qualification. To obtain this credit score in full in 2022, you will need to have made $15,000 or much less — a steep drop from 2021’s $125,000 revenue threshold — although households incomes as much as $438,000 will obtain a minimum of partial credit score.
5. Eligibility for the Earned Income Tax Credit has modified
Last yr, extra Americans have been eligible to say the Earned Income Tax Credit on their 2021 tax returns. This yr, the EITC jumps again to its pre-pandemic guidelines.
For your 2022 tax return, the utmost you’ll be able to declare for the EITC in the event you shouldn’t have children or dependents is $560, a $942 lower from final yr’s most of $1,502. The age necessities have additionally shifted again to the unique guidelines — you should be between 25 and 65 to qualify.
However, the revenue necessities for the EITC and most credit for these with kids have elevated barely as a consequence of inflation. The 2022 revenue thresholds and most credit score info are under:
2022 EITC revenue thresholds (for optimum credit score)
| Number of dependents | Filing as Single, Head of Household or Widowed | Married Filing Jointly |
|---|---|---|
| 0 | $16,480 | $22,610 |
| 1 | $43,492 | $49,622 |
| 2 | $49,399 | $55,529 |
| 3+ | $53,057 | $59,187 |
EITC most credit score for 2022
| Number of dependents | Maximum credit score in 2022 | Maximum credit score in 2021 | Difference |
|---|---|---|---|
| 0 | $560 | $1,502 | $942 lower |
| 1 | $3,733 | $3,618 | $115 improve |
| 2 | $6,164 | $5,980 | $184 improve |
| 3 or extra | $6,935 | $6,728 | $207 improve |
6. You may owe taxes on forgiven scholar loans
Whether you acquired scholar mortgage forgiveness by the Public Service Loan Forgiveness program or in the event you’re eligible for debt reduction by President Joe Biden’s scholar mortgage forgiveness plan, when you have any balances forgiven in 2022, you will not owe federal taxes on the canceled quantity. That’s due to a provision tucked into the 2021 American Rescue Plan, stopping forgiven post-secondary schooling loans from federal taxation by 2025.
However, there are a handful of states the place forgiven mortgage balances could also be taxed. Indiana, Minnesota, Mississippi and North Carolina have confirmed they’ll tax any scholar mortgage debt reduction in your 2022 taxes. A couple of different states might as nicely, although the small print are nonetheless being hammered out.
And, in the event you stay in one of many states taxing forgiven scholar loans, you could be on the hook for county taxes in your debt reduction, as nicely.
7. The IRS is cracking down on crypto and NFT transactions
While not technically new, for 2022 the IRS is making a extra concerted effort to trace cryptocurrency gross sales and trades. Whenever you promote or commerce your crypto or buy an merchandise with crypto, you set off a taxable occasion. Currently, crypto is taxed like property, making it topic to short- or long-term capital features taxes. This additionally means you’ll be able to report any crypto losses to assist offset any features. Since 2022 noticed a drastic drop within the worth of cryptocurrencies like bitcoin and ethereum, in the event you bought or traded your crypto at a loss, you could possibly scale back your tax invoice by reporting your capital loss. The identical goes for NFTs.
And although the IRS will flag any unreported crypto features, in the event you do not report a loss that may decrease your tax burden, the IRS will not alter your return in your behalf. “If you allow it off, it stays off,” stated Steber. “Tax deductible losses out of your digital foreign money exercise do have actual penalties in your tax return, and might prevent actual {dollars}. So I at all times inform folks, in the event you’ve acquired one thing that you do not totally perceive, you actually ought to search out steerage from a skilled skilled tax skilled.”
If you will have quite a lot of crypto or NFT exercise, we suggest speaking to a tax professional. But If you’d slightly deal with your taxes by yourself, take a look at our prime picks for crypto tax software program to make submitting your taxes just a little simpler.
8. PayPal, Venmo and different third-party apps will report your funds to the IRS
If you have been self-employed or freelancing for just a few years, you seemingly already know that you just’re required to report your freelance earnings to the IRS. This yr, your earnings might be even simpler for the IRS to entry, since third-party fee apps are actually reporting your fee exercise to the IRS.
While you may nonetheless have to report your earnings like typical, the distinction is, the IRS will have the ability to confirm the quantities you report in opposition to the transactions the fee apps present. So, in the event you’re off by $100, the IRS will know.
This new regulation may assist freelancers. Platforms like PayPal, Venmo, Cash App, Zelle and others might be offering customers with 1099-Okay varieties, which might make reporting your revenue just a little simpler.
And don’t be concerned — the cash you gifted to your children is secure from taxes. Only earnings despatched by these third-party apps are topic to taxation.
No matter the way you have been paid, in the event you had any self-employment revenue in 2022, Steber recommends working with a tax skilled to be sure you reap the benefits of each eligible tax break. “Self-employed folks have a few of the most complicated tax returns, and fairly frankly, a few of these profitable tax advantages within the tax code to be careful for,” he stated.
9. Retirement contribution limits elevated
For 2022, the person 401(ok) contribution restrict elevated to $20,500, a $1,000 improve from 2021. If you are over 50, you’ll be able to contribute a further $6,500. The complete contribution restrict, which incorporates your employer’s contributions, is $61,000 for 2022 ($67,500 for these 50 or older). IRA contributions remained unchanged at $6,000 for the yr, with a $1,000 extra catch-up contribution for these 50 or older.
Contributions to SIMPLE IRAs have been additionally elevated in 2022, rising from $13,500 to $14,000. Those over 50 can contribute a further $3,000.
With the top of the yr quick approaching, maximize your retirement contributions earlier than the top of December. However, when you have an IRA, you’ll be able to proceed contributing for tax yr 2022 till April 18, 2023, subsequent yr’s tax submitting deadline.
More Americans might qualify for the Saver’s credit score this yr, for the reason that IRS elevated the revenue thresholds for 2022. It’s value as much as $1,000 for single filers ($2,000 for married, joint filers), so long as you contribute to a retirement account and meet AGI necessities. For this tax yr, your AGI should not be over $34,000 for single filers and people married submitting individually, $68,000 for married, joint filers and $51,000 for head-of-household filers.
10. Temporary charitable donation deductions have ended
Fewer filers could possibly declare charitable donation tax breaks for this tax yr. The expanded charitable money contribution advantages that have been provided in 2020 and 2021 have ended. The non permanent suspension of the 60% AGI restrict in 2020 and 2021 is now again, limiting the quantity you’ll be able to declare in charitable contributions.