They say only two things are certain in this world — death and taxes. I might amend that list to add a third item: tax law changes.
A slew of changes have occurred recently, and although they’re not all bad, my clients are likely to be affected by at least some of them. Here are some of the most important ones:
- This year, Tax Day is April 18th. Because the 15th falls on a Saturday, and the following Monday, the 17th, is Emancipation Day, you have until April 18th to submit your returns and pay any balance due for 2022. The first quarter payment for 2023 is also due on the same date.
- The standard deduction has increased. As you know, the Tax Cuts and Jobs Act (TCJA) of 2017 made big changes to deductions, among other tax items. It did away with the personal exemption, going instead to a system in which the standard deduction was increased while limiting or eliminating other deductions that would otherwise be itemized. The TCJA still remains in effect through 2025, but the standard deduction has once again increased, to keep pace with inflation. For 2022, the standard deduction is as follows:
- Singles or married couples filing separately: $12,950 (up $400 from 2021)
- Marrieds filing jointly: $25,900 (up $800 from 2021)
- Heads of household: $19,400 (up $600 from 2021)
- Who has to file a tax return? Based on the change to the standard deduction, a single person who is 18 years or older who earned an income over $12,950 (the standard deduction), or whose unearned income (dividends, rental income) exceeds $1,150, will need to file a tax return. (For married couples, the $25,900 taxable income filing threshold applies.) However, there are certain exclusions for those earning more, and some earning less may be required to file in certain cases (for example, those who took Health Savings Account distributions, had net self-employment income of $400 or more, or are lucky enough to have large investment portfolios). So be sure to check with your accountant to determine whether you’re required to file or not.
- Capital gains rate thresholds have changed. Inflation has hit us all hard, but you might take comfort in knowing that the thresholds for capital gains tax have changed to taxpayers’ advantage. The capital gains rates are 0%, 15%, and 20%, depending on your taxable income; the IRS expanded the income range for each tax bracket, enabling taxpayers to earn slightly more before tipping into the next tax bracket. However, it’s important to note that the 0% rate is very difficult to obtain — it only applies to those whose earnings are comprised entirely of unearned income not exceeding $41,675 (individuals), $83,350 (married couples), or $55,800 (heads of household).
For most individuals, the capital gains rate is 15%; the 20% rate is for the highest-earning individuals. Following are the thresholds for long-term (investments held one year or more) capital gains and preferred dividends:
15% rate: Taxable income (single) $41,675 – $459,750
Taxable income (married, filing jointly) $83,351 – $517,200
Taxable income (heads of household) $55,801 – $488,500
20% rate: Taxable income (single) over $459,750
Taxable income (married, filing jointly) over $517,200
Taxable income (heads of household) over $488,500
These rates will further change — to taxpayers’ benefit — for 2023.
(However, I should point out that this rate is complicated by the Net Investment Income Tax of 3.8%, meaning that the 20% rate doesn’t really exist — it is actually 23.8%. The math is too complicated to discuss here, but I’m happy to discuss it with clients individually.)
Finally, a word about the “Kiddie Tax,” which applies to minors 17 and younger: If a minor has an investment portfolio that has provided unearned income exceeding $2,300, the tax rate will be based on the parents’ tax bracket.
- Federal tax brackets have adjusted for inflation. While the rates have not changed (they’re still 10%, 12%, 22%, 24%, 32%, 35%, and 37%), the composition of each bracket has changed. Unfortunately, the change, which reflects increases of about 3%, hasn’t kept pace with inflation, which is about double that percentage. Nonetheless, we’ll take it.
- Beware the “Hobby Rule.” If that sourdough-baking business you started during the pandemic has started earning you money, that’s great, but you’ll need to make sure you know the difference between what’s classified as a hobby by the IRS and what’s a genuine business. The IRS considers nine factors in its determination, including how much time is spent engaging in the activity, whether you depend on the income earned, whether it makes a profit, and more. It’s a good rule of thumb to keep your business and personal finances separate, maintain clear and accurate records, and consult an accountant about where your hobby stands tax-wise.
- Don’t worry about student loan forgiveness. It was a whole lot of sound and fury signifying nothing — the Biden Administration’s attempt to forgive student loans for millions of taxpayers is facing legal scrutiny, meaning that those champing at the bit in the hope that their loans will be forgiven are still waiting. In the meantime, it will not affect 2022 taxes in any way, and you should continue to make your loan payments as instructed, and include loan interest payments on your 2022 returns.
- Health Savings Account contribution limits have jumped. The amount you can contribute to an HSA has increased by $50 for self-only coverage and $100 for family coverage for 2022. The increases for 2023 are much more significant, with the limit for self-only going up by $200 and for families by $400.
- The SALT deduction is still capped at $10,000 through 2025, but… some states where you pay state taxes, including California, have come up with alternatives to circumvent this limitation. Though the SALT deduction doesn’t apply in Nevada, where we pay no state taxes, it does apply to those living in California and some other states (or paying state income taxes even while living in Nevada), so be sure to talk to us about some options that may help.
- Charitable deductions are gone. The TCJA’s effect on itemized deductions severely limited the tax benefits of charitable giving. However, the Biden Administration, in a move prompted by the pandemic, allowed taxpayers to deduct $300 and $600 for charitable giving in 2020 and 2021, respectively, regardless of whether they itemized. However, this is no longer the case for 2022. Alternative ways of charitable giving, such as Donor Advised Fund contributions and direct IRA transfers, are still available to reduce tax liability.
- The Child Tax Credit reverts to pre-2021 numbers. In 2021, the Biden Administration provided a bit of extra help to families with children, providing $1500 in cash payments and $1500 in tax credits for a total of $3000 for taxpayers with children ages 6-17. Those with children under 6 received even more. That credit was also fully refundable. That plan expired in December 2021, so for 2022, the tax credit is going back to $2000 for single filers earning $200,000 or less and families earning $400,000 or less. Only $1,500 of that will be refundable.
- Renewable energy pays in 2022. Be sure to read my previous blog about electric vehicles, solar energy, and energy-efficient home improvements to be sure you know how these might affect your tax return.
As always, there’s a lot to sort through when it comes to this year’s tax changes. We’re here to help! Be sure to contact us as soon as possible about your 2022 returns, and let us know about any changes you’ve experienced that could affect your taxes.
Until next time, stay warm and have a happy tax season!
-Ludmila