Tax Planning for 2022—What to Expect

The last four years have seen three major pieces of tax legislation enacted, combining for significant changes in tax rates, the standard deduction, tax credits, retirement accounts, and business deductions, to name just a few. Even more transformative tax legislation is pending in Congress under the Build Back Better plan, which may or may not make it through in its present form.

Thus far, 2022 is not expected to see any significant tax changes. Still, taxpayers do need to be aware of several provisions from previous legislation that are either expiring or in the process of phasing out. We’ll also take this opportunity to highlight some lesser-known provisions that could have a significant impact on your 2022 taxes.

Coronavirus Relief Changes

Under the CARES Act, taxpayers were given wider latitude in borrowing and taking distributions from a retirement plan. In 2021, penalty-free withdrawals and larger loan amounts were no longer available. If you did take a coronavirus-related distribution in 2020, you still have three years to repay it with the opportunity to claim a tax refund on any taxes collected on the distributions.

Stimulus Payment for 2021 Births

Parents who welcomed a newborn child in 2021 are eligible to receive a payment of up to $1,400 as part of the final round of stimulus checks authorized in the spring of 2021. Eligibility is based on the same income requirements that dictated previous stimulus payments.

What Remains the Same in 2022

We enter 2022 with no significant changes in the individual income tax provisions, except the usual inflation adjustments to income thresholds and exemption amounts.

Tax Rates

As in 2021, there are still seven tax brackets, starting at 0% and topping out at 37%. As is typical, the income thresholds for each bracket have been ratcheted up, allowing for more earnings before pushing your income into the next tier. For example, people earning up to $86,375 in 2021 fell into the 24% tax bracket. In 2022, that threshold is now $89,075.

Standard Deduction

The standard deduction increases by $800 in 2022 from $25,100 to $25,900 for joint filers. For single filers the increase is $400 from $12,550 to $12,900.

Capital Gains Taxes

There are still three tax brackets for capital gains and qualified dividends—0%, 15%, and 20%, but the income thresholds have increased slightly. For example, the income threshold for the 15% capital gains tax rate is now $83,350 for joint filers and $41,675 for single filers.

Itemized Deductions

Nothing has changed with the rules for itemized deductions. Taxpayers whose itemized deductions exceed the standard deduction can claim deductions for medical expenses exceeding 7.5% of their adjusted gross income.

Despite attempts by Congress to reverse the sales and local tax deduction (SALT) cap, it remains in effect in 2022, limiting the deduction for property, state, local, and sales taxes to $10,000 per year.

Retirement Plan Contributions

There are no changes for retirement plan contributions other than the standard annual increase. The maximum contribution to a 401(k) or similar defined contribution plan increases to $20,500 in 2022. However, the contributions limits for a traditional or Roth IRA remain at $6,000.

Tax Credits

There are no changes to the more widely used tax credits, such as the American Opportunity and Lifetime Learning tax credits.

The child tax credit remains the same as in 2021 at $2,000 per qualifying child, with up to $1,500 treated as a refundable credit. What is unknown is whether the option to receive monthly payments for the credit will continue in 2022.

Up in the Air for 2022

As part of coronavirus-relief legislation, the IRS allowed taxpayers to take an above-the-line deduction for charitable contributions made in 2021. Single filers could deduct up to $300, while joint filers could take $600. However, at this point, it is unclear whether this will be extended for 2022.

A Rude Surprise for Business Owners and Freelancers

Starting in 2022, third-party payment processors, such as PayPal, Zelle, and Venmo, must report business transactions by users exceeding $600 a year to the IRS. The change is the result of the American Rescue Plan enacted in 2021. Previously, payment processors were only required to report payments to users that exceeded $20,000 or 200 separate transactions. Of course, businesses and freelancers have always been required to report all the income they receive from customers, but it looks like the IRS wants to ensure they don’t miss anything.

Looking Ahead to Expiring Tax Provisions

The year 2022 represents the approximate halfway point between the enactment of the 2017 Tax Cuts and Jobs Act (TCJA) and the mass expiration of many of its key provisions at the end of 2025. In all, twenty-three income tax-related provisions are set to expire, which means most taxpayers will see a tax hike of some sort. The expiring provisions include:

• The current structure and tax rates of federal tax brackets.
• The increased Alternative Minimum Tax (AMT) exemption.
• The increased standard deduction.
• The increased child tax credit.

For businesses, the 20% pass-through deduction will be gone along with the full expensing of equipment, which starts to phase out in 2022.

Effectively, after December 31, 2025, the entire individual tax code will revert to what it was pre-TCJA. Once 2022 is over, taxpayers will have two years to plan for life after the TCJA, unless some or all of the provisions are extended. We’ll have a better idea of that likelihood following the 2022 mid-term elections.