Depending on the political scene in Washington, major shifts in tax law can also occur. With Congress gearing up to pass legislation that will authorize sweeping changes to the tax code later this year, it’s worth taking a look at some of the biggest upcoming changes. Here are the top 10 tax law changes to be on the lookout for.
1. Enhanced Child Tax Credit
The 2021 American Rescue Plan temporarily expanded the child tax from up to $2,000 per child per year to up to $3,000 per child per year (plus an additional $600 annually for children under 6). The legislation also provided the tax credit to all families, regardless of whether or not they had earned income.
Additionally, the law authorized advance monthly payments—that is, families could receive the credit in the form of refunds throughout the year, rather than having to wait for tax season to claim the credit.
However, these last two provisions have expired. For the following year, the credit will no longer go to families with earned income of less than $2,500, nor will monthly advances be issued.
2. Above-the-line Charitable Deduction
As part of a measure enacted by the CARES Act of 2020 that incentivized people to give to charity, taxpayers in 2021 can deduct $300 (or $600 if married filing jointly) in charitable deductions, even if they claim the standard deduction and don’t itemize.
Because most taxpayers don’t itemize, this charitable deduction can help many Americans offset some of their tax liability. However, this provision isn’t permanent, and unless extended, it’s slated to sunset after this year.
3. Required Minimum Distributions (RMDs)
To ensure that your tax bill eventually comes due, tax-advantaged retirement accounts like 401(k)s feature RMDs. This means that you’re required to withdraw a minimum amount of money from the account past a certain age and pay any taxes associated with the withdrawal.
Due to the COVID-19 pandemic, this requirement was waived in 2020, but it’s returning for this tax year. If you are normally required to make RMDs but didn’t last year, you should check to make sure that you don’t run afoul of any tax laws this filing season.
4. Retirement Account Contribution Limit Increases
While the return of RMDs may be bad news for taxpayers looking to limit their tax liability, it’s good news for younger taxpayers who are still saving for retirement. Beginning in 2022, the annual 401(k) contribution limit will increase from $19,500 to $20,500 per person. If a taxpayer is aged 50 or older, they’re eligible for an additional $6,500 “catch-up” contribution in 2022, bringing the total contribution limit to $27,000.
On the other hand, contribution limits for IRAs (both traditional and Roth) will remain fixed at $6,000 for the following year. Catch-up contributions for IRAs will also stay the same, at $1,000, meaning taxpayers 50 and above can contribute a total of $7,000 to their traditional or Roth individual retirement accounts.
For Roth accounts, income phaseout thresholds will also adjust upwards. You can find more information on these changes here.
5. Standard Deduction
The standard deduction, an amount non-itemizing taxpayers can exempt from federal income tax, is adjusted for inflation and will increase in 2022. For single filers and married taxpayers filing separately, the standard deduction will go up by $400, from $12,550 to $12,950. For married taxpayers filing jointly, the standard deduction will increase by $800, from $25,100 to $25,900.
Taxpayers who file as a head of household will see their standard deduction increase by $600, from $18,800 to $19,400.
6. Earned Income Tax Credit (EITC)
The EITC is aimed at significantly lowering the tax liability of low- to middle-income earners, especially those with children.
For childless taxpayers, the EITC can be worth as much as $1,502 in 2021, a $964 increase from the $538 maximum benefit in 2020. Single taxpayers earning less than $21,430 can qualify for the EITC (though the exact benefit amount will vary), while married taxpayers filing jointly who earned a combined total of less than $27,380 will be eligible.
For families, the EITC can be far more lucrative. For example, in 2021, married taxpayers filing jointly claiming 3 or more dependents can qualify for a maximum EITC of $6,728, up $68 from the maximum benefit of $6,660 in 2020.
Income limits similarly apply. For 2021, married couples with 3+ children must earn no more than $57,414, up $570 from the 2020 limit of $56,844. Find more information here.
7. Alternate Minimum Tax (AMT) Threshold
Most taxpayers won’t have to worry about the AMT, but certain high-earners who claim a large number of itemized deductions and credit may be subject to it. The AMT was established in 1969 to ensure that taxpayers with high incomes, regardless of how they structured their tax returns, would still have to owe some tax.
For 2022, the AMT exemption threshold for single taxpayers is $75,900, and starts to phase out at $539,900. For married taxpayers filing jointly, the exemption threshold is $118,100, and phase-outs begin at $1,079,800.
These amounts are all marginally higher than the figures in 2021 to adjust for the effects of inflation.
8. Annual and Lifetime Gift and Estate Tax Exclusions
Beginning in 2022, a taxpayer can gift each individual $16,000 per year without eating into their lifetime gift/estate tax exclusion, up $1,000 from the previous few years (when the limit was $15,000). Married taxpayers can double up their exclusion—they can give a combined $32,000 to any one individual starting in 2022.
Meanwhile, the lifetime gift and estate tax exclusion amount for 2022 will increase to $12,060,000, up $360,000 from $11,700,000 in 2021. Any amount a taxpayer gives to any non-charitable beneficiary per year in excess of the annual gift tax exclusion amount will count against their lifetime exclusion amount.
For taxpayers with large estates who have used up their lifetime exclusion, the federal gift and estate tax rate is 40%.
9. Foreign Earned Income Exclusion
The US is one of only a handful of countries that tax worldwide income, regardless of where a taxpayer was located during the tax year or where the income was earned. For American ex-pats living abroad who earn income in their foreign country of residence, the foreign earned income exclusion for 2022—the amount below which a taxpayer would incur no US tax liability—is $112,000, up $3,300 from the previous limit of $108,700.
This tax exclusion threshold, like many others, is adjusted for inflation in order to account for cost-of-living increases both stateside and abroad.
10. Tax Bracket Changes
The number of federal tax brackets in 2022 will remain the same at 7. The brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Keep in mind that these are marginal tax brackets, meaning that higher rates will apply only to income above a certain threshold. While you will owe more tax if you earn more, your after-tax income, all else held equal, will never be lower than if you had earned less and were in a lower tax bracket.
Additionally, keep in mind that income taxes only apply to income in excess of either the standard deduction or the sum of your itemized deductions, plus any above-the-line credits or deductions.
For example, for single taxpayers (and married taxpayers filing separately), the standard deduction is $12,950. The 10% tax bracket applies to taxable income from $0 to $9,950, the 12% tax bracket from $9,551 to $40,525, and so on.
If a single taxpayer has $20,000 in gross income and claims no other deductions or credits other than the standard deduction of $12,950, their taxable income will be their gross income reduced by the amount of their standard deduction, or $20,000 - $12,950 = $7,050. This places them in the 10% tax bracket, where they will owe 10% on $7,050 of taxable income, or $705.
If this taxpayer, in the same situation as before, has $30,000 in gross income, they will have $30,000 - $12,950 = $17,050 in taxable income. Their marginal tax bracket is 12%, but that does not mean they owe 12% on $17,050. Rather, they will owe 10% on the first $9,950, or $995, and then 12% on any amount above $9,950 (i.e, $17,050 - $9,950 = $7,100) or $852.
Their total income tax liability would then be $995 + $852 = $1,847.
The tax law is complex, and rules change frequently. In order to ensure you file your tax right and qualify for the highest refund possible, you should familiarize yourself with changes in the tax code. Though not every change will apply to your personal tax situation, most are significant and worth paying attention to.