Even though tax filing season is still months away, this is actually a great time of year to start thinking about next year's return. After all, the more tax planning you do, the more money you may be able to save. And if you see something now that can reduce your 2022 tax bill, there's still plenty of time to act before the year runs out. But proper tax planning requires an awareness of what's new and changed from last year — and there are plenty of tax law changes and updates for the 2022 tax year that savvy taxpayers need to know about.
Big tax breaks were enacted for the 2021 tax year. But most of those tax law changes expired at the end of 2021. As a result, the child tax credit, child and dependent care credit, earned income credit and other popular tax breaks are different for the 2022 tax year than they were for 2021. The Inflation Reduction Act might impact your 2022 tax return, too. Other 2022 tweaks are the result of new rules or annual inflation adjustments. But no matter how, when or why the changes were made, they can hurt or help your bottom line — so you need to be ready for them. To help you out, we pulled together a list of the most important tax law changes and adjustments for 2022 (some related items are grouped together). Use this information now so you can hold on to more of your hard-earned cash next year when it's time to file your 2022 return.
Child Tax Credit
Major changes were made to the child tax credit for 2021 – but they were only temporary. The credit amount was increased, the credit was made fully refundable, children up to 17 years of age qualified, and half the credit amount was paid in advance through monthly payments from July to December last year. President Biden and Congressional Democrats tried to extend these enhancements for at least one more year, but they haven't been able to get that done so far (and probably won't be able to later).
As a result, the child tax credit reverts back to its pre-2021 form for the 2022 tax year. That means the 2022 credit amount drops back down to $2,000 per child (it was $3,000 for children 6 to 17 years of age and $3,600 for children 5 years old and younger for the 2021 tax year). Children who are 17 years old don't qualify for the credit this year, because the former age limit (16 years old) returns. For some lower-income taxpayers, the 2022 credit is only partially refundable (up to $1,500 per qualifying child), and they must have earned income of at least $2,500 to take advantage of the credit's limited refundability. And there will be no monthly advance payments of the credit in 2022.
Child and Dependent Care Tax Credit
Significant improvements were also made to the child and dependent care credit for 2021. But, again, the changes only applied for one year.
By way of comparison, the 2021 credit was worth 20% to 50% of up to $8,000 in eligible expenses for one qualifying child/dependent or $16,000 for two or more. The percentage decreased as income exceeded $125,000. When you combine the top percentage and the expense limits, the maximum credit for 2021 was $4,000 if you had one qualifying child/dependent (50% of $8,000) or $8,000 if you had more than one (50% of $16,000). The credit was also fully refundable in 2021.
For 2022, the child and dependent care credit is non-refundable. The maximum credit percentage also drops from 50% to 35%. Fewer care expenses are eligible for the credit, too. For 2022, the credit is only allowed for up to $3,000 in expenses for one child/dependent and $6,000 for more than one. When the 35% maximum credit percentage is applied, that puts the top credit for the 2022 tax year at $1,050 (35% of $3,000) if you have just one child/dependent in your family and $2,100 (35% of $6,000) if you have more. In addition, the full child and dependent care credit will only be allowed for families making less than $15,000 a year in 2022 (instead of $125,000 per year). After that, the credit starts to phase-out.
Earned Income Tax Credit
More workers without qualifying children were able to claim the earned income tax credit (EITC) on their 2021 tax return, including both younger and older Americans. The "childless EITC" amounts were higher, too. However, once again, those enhancements expired at the end of last year.
Without the 2021 improvements in place, the minimum age for a childless worker to claim the EITC jumps back up to 25 for 2022 tax returns (it was 19 in 2021). The maximum age limit (65 years of old), which was eliminated for the 2021 tax year, is also back in play for 2022. The maximum credit available for childless workers also plummets from $1,502 to $560 for the 2022 tax year. Expanded eligibility rules for former foster youth and homeless youth that applied for 2021 are dropped as well. In addition, the rule allowing you to use your 2019 earned income to calculate your EITC if it boosted your credit amount no longer applies.
Recovery Rebate Credit
Americans were thrilled last March to hear they were getting a third stimulus check in 2021. Those checks were for up to $1,400, plus an additional $1,400 for each dependent in your family. (Use our Third Stimulus Check Calculator to see you how much money you should have gotten.) But some people who were eligible for a third-round stimulus checkdidn't receive a payment or got less than what they should have received. For those people, relief was available in the form of a 2021 tax credit known as the recovery rebate credit.
However, there are no stimulus check payments in 2022. As a result, there is no recovery rebate credit for the 2022 tax year.
Premium Tax Credit
The premium tax credit helps eligible Americans cover the premiums for health insurance purchased through an Obamacare exchange (e.g., HealthCare.gov(opens in new tab)). The American Rescue Plan Act (ARPA), which was signed into law in March 2021, enhanced the credit for 2021 and 2022 to lower premiums for people who buy coverage on their own.
But one of the enhancements that helped unemployed people doesn't apply in 2022. Under the ARPA, you were considered to have met the premium tax credit's household income requirements for the 2021 tax year if you (or your spouse if you filed a joint return) received, or were approved to receive, unemployment compensation for any week in 2021. However, if you receive unemployment benefits in 2022, you must satisfy all the normal eligibility requirements.
Extension of enhancements. The Inflation Reduction Act extended most of the premium tax credit enhancements through 2025. Unfortunately, though, the relaxed eligibility requirements for people who received unemployment compensation in 2021 was not extended to 2022 or beyond.
Long-Term Capital Gains Tax Rates
Tax rates on long-term capital gains (i.e., gains from the sale of capital assets held for at least one year) and qualified dividends did not change for 2022. However, the income thresholds to qualify for the various rates were adjusted for inflation.
In 2022, the 0% rate applies for individual taxpayers with taxable income up to $41,675 on single returns ($40,400 for 2021), $55,800 for head-of-household filers ($54,100 for 2021) and $83,350 for joint returns ($80,800 for 2021).
The 20% rate for 2022 starts at $459,751 for singles ($445,851 for 2021), $488,501 for heads of household ($473,751 for 2021) and $517,201 for couples filing jointly ($501,601 for 2021).
The 15% rate is for filers with taxable incomes between the 0% and 20% break points.
The 3.8% surtax on net investment income stays the same for 2022. It kicks in for single people with modified AGI over $200,000 and for joint filers with modified AGI over $250,000.
The standard deduction amounts were increased for 2022 to account for inflation. Married couples get $25,900 ($25,100 for 2021), plus $1,400 for each spouse age 65 or older ($1,350 for 2021). Singles can claim a $12,950 standard deduction ($12,550 for 2021) — $14,700 if they're at least 65 years old ($14,250 for 2021). Head-of-household filers get $19,400 for their standard deduction ($18,800 for 2021), plus an additional $1,750 once they reach age 65 ($1,700 for 2021). Blind people can tack on an extra $1,400 to their standard deduction ($1,350 for 2021). That jumps to $1,750 if they're unmarried and not a surviving spouse ($1,700 for 2021).
The estate exemption doubles to $11.2 million per individual and $22.4 million per couple in 2018.
Starting with the 2022 tax year, third-party payment settlement networks (e.g., PayPal and Venmo) will send you a Form 1099-K if you are paid over $600 during the year for goods or services, regardless of the number of transactions. Previously, the form was only sent if you received over $20,000 in gross payments and participated in more than 200 transactions. The gross amount of a payment doesn't include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts.
This change to the reporting threshold means more people than ever will get a 1099-K form next year that they will use when filling out their income tax returns for the 2022 tax year. However, remember that 1099-K reporting is only for money received for goods and services. It doesn't apply to payments from family and friends.
Charitable Gift Deductions
The "above-the-line" deduction for up to $300 of charitable cash contributions ($600 for married couple filing a joint return) expired at the end of 2021. As a result, it isn't available for the 2022 tax year (it was available for 2020 and 2021). Only people who claimed the standard deduction on their tax return (rather than claiming itemized deductions on Schedule A) were allowed to take this deduction.
The 2020 and 2021 suspension of the 60%-of-AGI limit on deductions for cash donations by people who itemize also expired, so the limit is back in place starting with the 2022 tax year.
Here's some good news for retirees: The IRS updated the table used to calculate required minimum distributions (RMDs) to account for longer life expectancies beginning in 2022. That means RMDs should be a bit smaller starting in 2022 than they were before.
For people who are still saving for retirement, many key dollar limits on retirement plans and IRAs are higher in 2022. For example, the maximum contribution limits for 401(k), 403(b) and 457 jumps from $19,500 to $20,500 for 2022, while people born before 1973 can once again put in $6,500 more as a "catch-up" contribution. The 2022 cap on contributions to SIMPLE IRAs is $14,000 ($13,500 in 2021), plus an extra $3,000 for people age 50 and up.
The 2022 contribution limit for traditional IRAs and Roth IRAs stays steady at $6,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and up. However, the income ceilings on Roth IRA contributions went up. Contributions phase out in 2022 at adjusted gross incomes (AGIs) of $204,000 to $214,000 for couples and $129,000 to $144,000 for singles (up from $198,000 to $208,000 and $125,000 to $140,000, respectively, for 2021).
Deduction phaseouts for traditional IRAs also start at higher levels in 2022, from AGIs of $109,000 to $129,000 for couples and $68,000 to $78,000 for single filers (up from $105,000 to $125,000 and $66,000 to $76,000 for 2021). If only one spouse is covered by a plan, the phaseout zone for deducting a contribution for the uncovered spouse starts at $204,000 of AGI and ends at $214,000 (they were $198,000 and $208,000 for 2021).
More lower-income people may be able to claim the "saver's credit" in 2022, too. This tax break can be worth up to $1,000 ($2,000 for joint filers), but you must contribute to a retirement account and your adjusted gross income (AGI) must be below a certain threshold to qualify. For 2022, the income thresholds are $34,000 of adjusted gross income (AGI) for single filers and married people filing a separate return ($33,000 for 2021), $68,000 for married couples filing jointly ($66,000 for 2021), and $51,000 for head-of-household filers ($49,500 for 2021).
Adoption of a Child
For 2022, the adoption credit can be taken on up to $14,890 of qualified expenses ($14,440 for 2021). The full credit is available for a special-needs adoption, even if it costs less. The credit begins to phase out for filers with modified AGIs over $223,410 and disappears at $263,410 ($214,520 and $254,520, respectively, for 2021).
The exclusion for company-paid adoption aid was also increased from $14,440 to $14,890 for 2022.
Student Loan Interest Deduction
We're all waiting to see if and when President Biden will cancel student loan debt. But even if your student loan debt isn't cancelled (or only some of it is forgiven), you may be able to deduct up to $2,500 of student loan interest paid each year. However, the credit amount is gradually reduced to zero if your modified AGI is over a certain amount.
If you're filing anything other than a joint return, the phase-out range did not change for the 2022 tax year. The credit amount still starts dropping if your modified AGI is over $70,000 and is reduced to zero once your modified AGI hits $85,000. However, for married couples filing a joint return, the phase-out range is adjusted for 2022. It kicks in at $145,000 ($140,000 for 2021), while the credit is fully phased out if modified AGI exceeds $175,000 ($170,000 for 2021).
Residential Clean Energy Credit
The Inflation Reduction Act, which was signed into law on August 16, 2022, renamed the former Residential Energy Efficient Property Credit so that it's now called the Residential Clean Energy Credit. But, more importantly, the credit amount was increased starting with the 2022 tax year.
Before the Inflation Reduction Act, the credit was generally worth 26% of the cost to install qualifying electric, water heating, or temperature control systems for your home that use solar, wind, geothermal, biomass or fuel cell power. The credit percentage was also scheduled to drop to 23% in 2023 and then expire in 2024.
Now, the credit is increased to 30% starting in 2022. It eventually drops to 26% for 2033 and 22% for 2034, before the credit expires in 2035. In addition, it doesn't apply to biomass furnaces and water heaters anymore. However, starting in 2023, it will apply to battery storage technology with a capacity of at least three kilowatt hours.
Clean Vehicle Credit
The electric vehicle tax credit was also revised by the Inflation Reduction Act (including a name change to the Clean Vehicle Credit). Most of the amendments to the EV creditdon't apply until 2023. However, there could be some impact on your 2022 tax return if you buy an electric vehicle this year.
One of the changes made by the Inflation Reduction Act requires final assembly of a qualifying clean vehicle to occur in North America. This requirement is effective for vehicles sold after August 16, 2022 (i.e., the date the legislation was signed into law). Therefore, if you purchase an electric vehicle between August 17 and the end of the year, you won't qualify for the existing credit for the purchase of a new electric vehicle if it wasn't assembled in North America.
To help determine if a vehicle satisfies this new requirement, the U.S. Department of Energy has a general list of vehicles with final assembly in North America on its website(opens in new tab). However, before buying a new electric vehicle, you should also check the National Highway Traffic Safety Administration's VIN number decoder(opens in new tab) to be absolutely make sure the exact vehicle you intend to purchase qualifies for the new credit (look for the "Plant Information" on the results page).
Two other new requirements could also trip up EV buyers in 2022. Under the new law, in order for an electric vehicle to qualify for the credit, a certain percentage of the critical minerals in the vehicle's battery must be (1) extracted or processed in the U.S. or a country that has a free trade agreement with the U.S., or (2) recycled in North America. In addition, a certain percentage of the vehicle's battery components must be manufactured or assembled in North America. These requirements don't take effect until the Treasury Department issues proposed guidance about them. The guidance must be issued by December 31, 2022. So, if the guidance is issued earlier in the year, these requirements potentially could apply to some EV purchases in 2022.
For some people, there's a loophole available that will allow them to bypass any of the new requirements. If you purchased a new electric vehicle (or entered into a written binding contract to do so) before August 16, 2022, but you don't actually take possession of the vehicle until August 16 or later, you can still claim the credit based on the old rules in place before August 16. So, for example, the final assembly requirement wouldn't apply in that situation.
Americans Working Abroad
U.S. taxpayers working abroad have a larger foreign earned income exclusion in 2022. It jumped from $108,700 for 2021 to $112,000 for 2022. (Taxpayers claim the exclusion on Form 2555(opens in new tab).)
The standard ceiling on the foreign housing exclusion is also increased from $15,218 to $15,680 for 2022 (although overseas workers in many high-cost locations around the world qualify for a significantly higher exclusion).
Standard Mileage Rates
Thanks to skyrocketing gas prices, the IRS took the unusual step of adjusting the standard mileage rates for 2022 in the middle of the year. Therefore, the rates applicable during the first half of the year are different than the rates used for the second half. The mileage rates are used to calculate tax deductions for the use of an automobile (i.e., a car, pickup truck, or van) for business purposes, medical-related travel, and moving expenses for active-duty members of the military.
From January 1 to June 30, the 2022 standard mileage rate for business driving is 58.5¢ per mile (56¢ per mile in 2021). The mileage allowance for medical travel and military moves for the same time span is 18¢ per mile (16¢ per mile in 2021).
From July 1 to December 31, the 2022 mileage rate for use of an automobile for business purposes rises to 62.5¢ per mile. The standard rate for medical-related driving and military moving expenses jumps to 22¢ per mile for the second half of 2022.
Note that the standard mileage rate for the use of an automobile for charitable purposes didn't change from 2021 to any part of 2022. It stayed put at 14¢ a mile because it's fixed by law.