Individual Income Tax Update—Tax Year 2022 

Individual Income Tax Update—Tax Year 2022

Taxes, they’re never fun. Every year we have to shell out a chunk of our hard-earned money to the government, and it can be frustrating not knowing exactly how much you’ll owe until it’s time to file your return.

But while paying taxes may not be anyone’s favorite pastime, staying up to date on the latest tax law changes is essential so you can plan accordingly. After all, nobody likes getting caught off guard by a surprise tax bill.

With that in mind, here’s an overview of the individual income tax changes for 2022.

Federal Income Tax Brackets—A comparison between 2021 and 2022

There are seven federal income tax brackets in the United States, and your marginal tax rate is determined based on which bracket your taxable income falls into. Whether tax rates go up or down year over year depends on various economic and political factors, such as inflation and tax reform.

In 2021, the tax brackets as charged by a percentage of taxable income were:

But in preparation for the 2022 tax year, the IRS has released updated income tax bracket figures. Here are the new 2022 brackets:

These updated 2022 tax brackets will apply to income earned in 2022 and filed in 2023. So, if you’re already thinking ahead to next year’s taxes, be sure to use the new 2022 brackets when you file in 2023.

There are some modest changes to the income tax brackets for 2022; the tax rate allocable to each bracket will remain the same as 2021, and the range for each bracket will expand slightly compared to 2021.

Standard Deduction

Taxpayers who do not itemize their deductions on Schedule A can take the standard deduction when filing their personal taxes. If you’re unsure whether to itemize or take the standard deduction, it’s usually best to compare the two and see which one will give you the biggest tax break.

See below for the 2022 Standard Deduction by filing status:

• $12,950 for single and married filing separately (compared to $12,550 in 2021)
• $25,900 for married filing jointly (compared to $25,100 in 2021)
• $19,400 for head of household (compared to $18,800 in 2021)

Seniors (age 65 and older) and taxpayers who are blind can take an additional standard deduction of $1,400 if they are married filing jointly (compared to $1,350 in 2021). In the case where both spouses are 65 or older and/or blind, the additional standard deduction is $2,800 (compared to $2,700 in 2021). If a taxpayer is 65 or older and/or blind and files single head of household, their additional standard deduction is $1,750 (compared to $1,700 in 2021).

In 2021, taxpayers who took the standard deduction could deduct $300 of charitable contributions they paid in cash ($600 if married filing jointly). This was a special allowance for 2021, as charitable contributions are otherwise treated as an itemized deduction. Unfortunately, this provision was not extended to the 2022 tax year.

Child Tax Credit

When it comes to personal taxes, it’s critical to know which credits and deductions you qualify for. The Child Tax Credit can save you up to $2,000 per child on your taxes. It can be used to either offset your income tax liability or increase your refund (refundable portion is limited to $1,500 based on your income). If you have foster or adopted children, they are also eligible for the Child Tax Credit.

To qualify for the Child Tax Credit, your child must meet the following criteria:

• Be age 16 or younger at the end of the tax year
• Be a U.S. citizen or resident alien
• Have lived with you for more than half of the tax year
• Not provide more than half of their own support for the tax year

This represents a significant decrease compared to the 2021 tax year, where parents with children ages 6 to 17 could claim a credit of up to $3,000 and for children under 6 they could claim a whopping $3,600. It’s also worth noting that last year the tax credit was fully refundable, unlike 2022 where it’s capped at $1,500.

Earned Income Credit

The Earned Income Credit, or “EIC”, is a tax credit for low and moderate-income earning taxpayers. To qualify, you must have earned income from working. This includes income from a job, self-employment, or farming. You must also meet the following additional qualifying rules:

• Have investment income below $10,000
• Have a valid Social Security number by April 17, 2023
• Be a U.S. citizen or a resident alien all year
• Must not file Form 2555 – Foreign Earned Income

The credit you’re allowed to take varies depending on the number of qualifying children you have (same rules as Child Tax Credit), your filing status, and your taxable income. See below for the 2022 EIC table:

Compared to 2021 the maximum earned income tax credit and associated income threshold decreased significantly for taxpayers with no qualifying children and increased slightly for taxpayers with one, two, or three qualifying children, as can be seen from the 2021 EIC table below:

Electric Vehicle (“EV”) Credit

The EV Credit was enacted to incentivize taxpayers to purchase an electric vehicle in an effort to reduce the output of carbon emissions. This credit is available for taxpayers who purchase a new electric vehicle, such as a hybrid or plug-in electric car. The credit is worth up to $7,500 which represents no change from 2021 to 2022. The credit is nonrefundable meaning it can reduce your current year tax liability to zero, but the excess cannot be refunded, nor can it be carried forward to next year’s taxes.

To qualify for the credit, the vehicle must be:

• A new passenger vehicle or light truck
• Powered by a battery with at least 4-kilowatt hours of capacity
• Made by a manufacturer that certifies the vehicle for credit

The Inflation Reduction Act yields the following noteworthy changes to the EV Credit:

• The timeline to qualify is extended from January 2023 to December 2032
• The tax credit cap for automakers after they’ve sold 200K EVs is eliminated
• The EV credit will be implemented at the point of sale rather than via your individual income tax return
  • The language in the Act suggests this may not kick in until 2024
  • In order to get the full credit the “critical minerals” and battery components must come from North America and the EV must be assembled in North America
• The EV credit is now available to individuals reporting adjusted gross income of $150K or less, or $300K for married filing jointly filers in the 2022 tax year

Conclusion

With an ever-changing tax code, it’s important to stay up to date so there are no surprises – good or bad. Although there aren’t any massive changes for individual taxpayers in 2022, there are some modest changes that you should be aware of.

If you’re seeking a CPA to assist with your 2022 tax filings, click here to get connected with one of our professionals.