January 14, 2022
As the recovery from the pandemic takes hold and the economy and life begin to return to a more recognizable form of normal, we hope you and your loved ones are safe and in good health. Throughout 2021, Congress has enacted various provisions designed to help taxpayers recover from the COVID-19 pandemic and extended previously temporary relief. The major legislation came from the American Rescue Plan (ARP) Act passed in March 2021, but the Coronavirus Aid, Relief, and Economic Security Act or “CARES Act” and the Consolidated Appropriations Act, 2021 or “CAA, 2021” both passed in 2020 will have lingering impacts on your 2021 individual tax return. Highlighted below are some of the more significant changes made by this legislation and what to expect in the coming 2022 year:
Charitable contributions deductible by non-itemizers – All taxpayers who take the standard deduction may take an additional above-the-line deduction for cash contributions to qualified charitable organizations in 2021. CAA, 2021 extended this deduction for the 2021 tax year and modified to allow $300 for single filers and $600 for married filers. The above-the-line deductions has not been extended into 2022 at this time.
No income limitation on charitable contributions — As with the prior year, there are no limitations on qualified charitable contributions. Charitable contributions deductions were limited to 60% of a taxpayer’s adjusted gross income previously in 2019. In response to the COVID pandemic, the limit on cash charitable contributions by an individual was increased to 100% of the individual’s adjusted gross income for 2000 and for 2021. For 2022, the limitation reverts back to earlier limitation of 60% of AGI.
Child Tax Credit – The ARP significantly increased the child tax credit (CTC) available in 2021. The CTC was increased from $2,000 to $3,000 or, for children under 6, to $3,600. The age of a child for which the credit is available was raised from 16 to 17. Further, the refundable amount of the 2021 CTC equals the entire credit amount, rather being based on an earned income formula. Under modified phase-out rules, the modified adjusted gross income threshold which determines if an individual qualifies for the CTC was reduced to $150,000 in the case of a joint return or surviving spouse, $112,500 in the case of a head of household, and $75,000 in any other case.
Many taxpayers received advanced refundable credits throughout 2021. If you did, please provide
our office with the amounts received by recording it on the Tax Organizer.
For 2022, the monthly advanced credit is not set to continue. It will revert back to a onetime credit
of $2,000 per child on the 2022 tax return filed in 2023.
Unemployment Compensation – In March 2021, the IRS announced that if taxpayers earn less than $150,000 AGI, it will automatically refund taxes paid on the first $20,400 of unemployment benefits for MFJ and $10,200 for all other taxpayers. If you feel you were eligible for this refund on your 2020 return and have not received it, please contact your FRSCPA tax professional.
Third round of stimulus checks – Many taxpayers received the third recovery rebate tax credit in March 2021. Single individuals and joint filers were entitled to a payment of $1,400 for each eligible individual. The amount of the recovery rebate phases out for income over a certain level. The 2021 recovery rebate began phasing out starting at $75,000 of adjusted gross income (AGI) for an individual ($112,500 for heads of household and $150,000 in the case of a joint return or surviving spouse) and was completely phased out where an individual’s AGI is $80,000 ($120,000 for heads of household and $160,000 in the case of a joint return or surviving spouse).
The government began issuing the rebates based on 2019 income tax returns, or 2020 returns for
individuals who filed their 2020 returns in time. The calculation for the correct amount of the
rebate will be part of your 2021 tax return. If your 2021 tax return indicates a rebate larger than
your stimulus check ( because, for example, your income went down or you had another child),
any additional amount will be claimed as a credit against your 2021 tax bill. On the flip side, if the
2021 rebate calculation shows an amount in excess of what you were entitled to, you do not have
to repay that excess.
If you did receive a third stimulus check please record on the Tax Organizer how much received.
In addition to the above modifications, there were some minor changes outside of major legislation. Highlighted below are some of those changes, with a few reminders:
• Individual tax rates — The 2022 individual income tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
• Standard deduction — In 2022, the standard deduction will be $25,900 for joint filers, $19,400 for heads of households, and $12,950 for singles.
• $10,000 limit on state and local tax deduction — The total state and local tax deduction is still limited to $10,000 for 2021. If enacted, the Build Back Better Act will likely modify the SALT cap for taxpayers, with exact application and limitations still to be determined in negotiations.
• Limits on mortgage interest deduction — Taxpayers may only deduct interest on the first $750,000 of mortgage acquisition debt incurred after December 15, 2017. Mortgage acquisition debt is any debt secured by a taxpayer’s principal residence which is used to acquire, construct, or substantially improve the residence. Mortgage interest on a principal residence which is not used for those purposes is no longer deductible.
• Medical expense deduction — All individuals may deduct medical expenses if the expenses exceed the new floor of 7.5% of adjusted gross income, regardless of age, for both 2021 and 2022.
• No deduction for investment expenses or unreimbursed employee expenses — There is still no deduction for employee expense, investment expense, or any other 2% miscellaneous itemized deduction in 2021 or 2022.
• Adoption Credit — In 2022, the credit for adoption of a child with special needs is $14,890 and the maximum credit allowed for other adoptions other than the adoption of a special needs child is $14,890.
• IRA contributions — When you have earned income, you can contribute up to $6,000 in 2021, and $6,000 in 2022 (no change). You have until April 15th, 2022 to make your 2021 contribution. If you are 50 or older, you can contribute another $1,000 for a total of $7,000. As a reminder from the Secure Act, there is no age limit for making regular contributions to an IRA.
• 401K Plan contributions — The limit for 2022 increased by $1,000 and is now $20,500. The catch-up contribution (50 and older) is $6,500, bringing total contributions to $27,000 for 2022.
• HSA Contributions — Health Saving Accounts enable you to set aside pretax dollars to cover qualified medical expenses, as long as you have a qualified high-deductible health plan in place. For the 2022, the maximum HSA contribution limits are $3,650 for an individual and $7,300 for family coverage.
• Annual Exclusion for Gifts — The annual exclusion increases to $16,000 for 2022, up from $15,000 in 2021.
• Estate and Gift Exemption — The annual estate and gift exemption increases to $12,060,000 in 2022, up from $11,700,000 in 2021.
If you have any questions or would like for us to analyze your particular situation, please do not hesitate to contact our office.