The end of Covid tax breaks might mean a higher tax bill for 2022.
Congress chose not to extend the tax breaks implemented during the Covid-19 pandemic. As a result, some who received refunds in recent years may now owe instead. Changes affecting your taxes as quoted from a recent *Wall Street Journal article are:
Federal Economic Impact Payments
Most taxpayers received their 2021 stimulus checks automatically but some got the money as a recovery rebate credit of $1,400 per person on their 2021 income tax return. For a family of four, that could have meant a $5,600 credit on their 2021 taxes that won’t be on this year’s return.
Flush with money, more than a dozen states issued taxpayers rebates and refunds in 2022. Although these payments won’t count as taxable income on state returns, they often will count as taxable income on federal returns. For example, California has sent tens of millions of taxpayers payments ranging from $200 to $1,050. The IRS may count these payments as income on federal returns, says Kathryn Zdan, an enrolled agent and tax editor at Spidell Publishing in Anaheim, Calif.
Nonitemizer Charitable Deduction
Congress didn’t extend this temporary tax break that allowed a special charitable deduction for taxpayers who take the standard deduction instead of itemizing. The $300 deduction individuals could take, or $600 for married couples, wasn’t available for tax year 2022 and could mean a small increase in tax bills.
Child Tax Credit
Taxpayers with dependent children need to pay extra attention. For 2022, the child tax credit has reverted to $2,000 for children under age 17. That is a big drop from the enhanced child tax credit for 2021 of $3,000 for children under age 18 and $3,600 for children under age 6. If you included two children as dependents when you initially filled out a W4 tax withholding form at work and your children have since aged out, make sure you update your W4 so your employer will withhold more in taxes, Ms. Logan says.
Child and Dependent Care Tax Breaks
The tax credit for child and dependent care expenses, such as daycare, was increased to a total of $8,000 for 2021 but went back to the old limit of $2,100 for 2022. Those who took the maximum $8,000 credit (up to 50% of $16,000 in expenses for two or more children) last year and the maximum $2,100 credit (up to 35% of $6,000 in expenses for two or more children) this year are likely to see a much lower refund, Ms. Logan says.
Similarly, taxpayers whose employers offer pretax child and dependent care flexible spending accounts may see lower refunds because the contribution limits for those accounts were also increased for 2021, to a maximum $10,500, and reverted to the old limit, $5,000, for 2022.
Investment Gains and Losses
Last year, some mutual funds sold more holdings than usual and distributed gains to investors. That could mean bigger tax bills and smaller refunds for individual investors this tax season, even though their portfolios shrank. “Investments can throw you off,” Ms. Logan said. In the case of a new client last tax season, Ms. Logan said he made $80,000 in the stock market in 2021 and owed $16,000 in taxes he hadn’t counted on in the 2022 filing season. There is still time to pay fourth-quarter estimated tax payments through Jan. 17 and lessen penalties and interest owed.
On the other hand, investors who sold cryptocurrency or tech stocks at a loss, for example, can use those losses to offset gains and up to $3,000 of ordinary income. That offset could leave someone with a bigger refund.”
Ultimately, if you think you may end up owing more this tax season, its important you set aside cash now to pay your taxes and avoid fines. For many, this may mean delaying major purchases until after tax time.