A Return to Normalcy Could Impact Your 2022 Tax Return
2020 and 2021 were chaotic years from an individual income tax perspective. The COVID-19 pandemic led to previously unseen levels of tax stimulus designed to put money in taxpayers’ pockets and keep our country and our economy moving. Between three rounds of economic stimulus payments, the expanded Child Tax Credit, and other tax provisions, 2020 and 2021 tax returns looked quite a bit different from prior years, with most of it working in the taxpayers’ favor.
Many of these tax provisions that impacted the 2020 and 2021 tax returns were only temporary. As of the date of this posting, many of the provisions have expired, and there are currently no solid plans in to extend them into 2022. We want to make sure you are aware of some of the expired provisions and how they might affect your tax return:
Child Tax Credit and Related Advance Payments
The Child Tax Credit is a dollar for dollar reduction of your tax liability based on the number of dependent children claimed on your tax return. For 2021, Congress increased this credit to $3,600 for each child under the age of 6 and $3,000 each for all dependent children aged 6-17. For 2022, the expanded Child Tax Credit expires, and the credit is reduced to $2,000 for each child under the age of 17. While the impact of this change could negatively affect your year end tax refund, the expiration of the advance payments of the child tax credit may offset this. Taxpayers who did not elect out of receiving these advance monthly payments in 2021 received up to half of the amount of the Child Tax Credit in advance via monthly payments from July-December of 2021. The remaining half of the credit reduced your tax liability on your year end return. So taxpayers that did not elect out of the advance payments in 2021 effectively had only half of the credit ($1,500-$1,800 per child) offset taxes reported on their return. For 2022, the impact of these credits should be the full $2,000.
Child and Dependent Care Credits
2021 also saw enhancements to the Child and Dependent Care Credit. This credit is calculated as a percentage of qualified childcare expenses incurred for dependent children under the age of 13. For 2021, the maximum amount of childcare expenses that could be used for this credit was increased from $3,000 to $8,000 per child. Also, the credit % was increased from a maximum of 35% to 50%. As a result, the maximum tax credit per child increased in total from $1,050 to $4,000! For 2022, this credit returns to the old calculation, which could substantially impact your 2022 tax return!
Tax Benefits from Filing Separate Tax Returns
2020 and 2021 saw married taxpayers taking advantage of larger refunds by filing separate tax returns more than ever before. Most of this benefit was a result of the economic stimulus and advance child tax credit payments. With both of those provisions gone for 2022, most taxpayers will not see the level of savings from filing separately that they recognized in the past two years.
These are just some of the larger and common items that may impact your tax return for 2022. There are several other changes that may also impact you when it comes time to file your return next winter. If you have any questions on how the above changes or any other changes to your tax situation may impact your return, please give us a call. We would love to talk to you!