There's one thing that every taxpayer, regardless of their financial situation, can agree on. We all want to pay the least amount of taxes to Uncle Sam as possible.
The key way to get our taxable income to the lowest possible level is by claiming deductions, either the standard option by itemizing as discussed in Part 2 of the ol' blog's annual inflation adjustment series. Either option helps lower your taxable income.
But there are additional deductions we should check out at filing time, like the above-the-line deductions anyone can claim.
Then there are tax credits, which are a better tax break since they offer direct dollar-for-dollar reductions of our tax bill. Some can even give us a refund.
And in some cases, the tax code says that a portion of our income is not taxable at all.
Even better, many of these tax reducing options are adjusted every year for inflation. Here's a look at the 2022 cost-of-living revisions to them in this Part 4 of the ol' blog's annual tax inflation series.
Child tax credit: We start this year's inflation adjustments with a family-related tax break that's already received a lot of attention this year.
Most taxpayers with children are well aware of the Child Tax Credit (CTC), which is available for each qualifying child. The CTC has been around in some form since 1997, but was enhanced back in March as part of the American Rescue Plan Act (ARPA).
ARPA was passed to help folks struggling during the COVID-19 economic downturn, including a variety of tax changes. One of them hiked the 2021 amount of the CTC to $3,600 for each child younger than age 6 and $3,000 per child for youngsters ages 6 to 17. In order to get the money into the hands of eligible families as soon as possible, ARPA allowed for half of the 2021 amount to be distributed early this year.
Even better, the latest coronavirus-relief law made the full CTC a fully refundable tax credit. This means that instead of just zeroing out your tax bill, this tax break in 2021 could net you a tax refund even if your tax bill is zero.
The Biden Administration wants to extend the enhanced CTC beyond the 2021 tax year, but Congress must agree. If it doesn't, the Child Tax Credit in 2022 would revert back to $2,000 per qualifying child. The amount of the CTC that would be refundable also would drop from the now-2021-tax-year-only full credit amount to $1,500.
Adoption tax credit, employer assistance: It's no secret, even to those of us without children, that kiddos cost a lot. That was a driver in the enhanced CTC change.
Luckily, Uncle Sam offers additional family-friendly breaks to help moms and dads deal with child-related expenses.
One of them offers financial help in the form a tax credit and tax-free employer assistance for folks who grow their families through adoption.
In 2022, a company can provide eligible adoptive parents up to $14,890 in tax-free help to cover the costs associated with adding to their families. This new income exclusion amount is up a bit from the $14,400 allowed in 2021.
Even if adoptive parents don't get help from their employers in 2022, they can claim next year an adoption credit of up to that same maximum of $14,890. Again, this if for all adoptions, including of a child with special needs. And again, this is an increase from the 2021 amount of $14,440.
Both the adoption income exclusion and tax credit amounts will begin to phase out in 2022 when individuals have MAGI greater than $223,410. Once the adoptive parents hit MAGI next year of $263,410, they cannot claim the tax-favored adoption assistance.
The 2022 hikes are up from 2021's income phaseouts, which start at MAGI of $216,660 and end when adoptive parents' modified income is $256,660 or more.
Depending on the adoption's cost, you may be able to claim both the tax credit and the exclusion. However, you can't double dip; that is, you cannot claim both a credit and exclusion for the same adoption expenses.
Note, too, that the tax credit is not refundable. Any extra adoption credit after you reduce your tax bill to zero won't come back to you as a refund.
Earned Income Tax Credit, or EITC: The Earned Income Tax Credit (EITC), which was created in the 1970s as an outgrowth of President Lyndon B. Johnson's War on Poverty, is a major tax break for middle- and lower-income workers. It is not changed under the new tax laws.
Like the Child Tax Credit, ARPA also increased the 2021 tax year's EITC benefits and made it available to more taxpayers. Note, too, that while taxpayers with dependent children get larger EITC amounts, the credit also is available to filers without youngsters.
The latest inflation adjustments mean the maximum credit amounts in 2022, determined by your family size, will be:
- $6,935 for taxpayers filing jointly who have three or more qualifying children,
- $6,164 with two qualifying children,
- $3,733 with one qualifying child and
- $560 if you don't have any qualifying children in 2022.
Note that amount for an EITC claimant with no children. It's much lower than the 2021 amount that was hiked by ARPA. If Congress doesn't agree to keeping the larger amount, the EITC amount for child-free taxpayers will encounter this dramatic drop because it was based on the smaller, original 2021 amount of $543 for these filers.
Overall, for comparison purposes, the 2021 tax year refundable maximum EITC amounts with the ARPA changes are:
- $6,728 for taxpayers with three or more qualifying children
- $5,980 for two qualifying children,
- $3,618 for those with one qualifying child, and
- $1,502 for filers with no qualifying children. Again, this almost tripled EITC amount for single filers was a 2021-only change under ARPA.
One thing that didn't change is that all these amounts are refundable, meaning any credit amount that is more than your tax bill comes back to you as, per its name, an IRS refund.
Of course, the key to claiming the EITC is to fall within the tax credit's earnings' guidelines. If you don't make enough money, you can't claim it. Make more, and the credit amount is reduced. And if you make what is deemed too much, you can't claim the EITC at all.
To claim any EITC amount in 2022, inflation adjustments mean that your earned and adjusted gross income (AGI) next year each must be less than the following amounts:
3 or More Children
In addition, if you have what the IRS deems is "excessive investment income," you're not eligible for the EITC. For 2022, that earnings amount is $10,300.
For comparison, the 2021 tax year maximum EITC claim earnings limits are:
3 or More Children
For 2021, the excessive investment income amount is $3,650.
Student loan interest: Paying for higher education is a major expense, for students and their families. That's why so many students and/or their families take out loans to pay for college.
You can offset a portion of that educational debt by using the Schedule 1 write-off for student loan interest. This $2,500 tax break is set by law, so it doesn't change each year based on inflation.
However, the ability to claim this above-the-line deduction is based on your income and those earnings thresholds can be affected by inflation.
In 2022, you can claim the full $2,500 student loan interest deduction as long as you, as a single taxpayer, have modified adjusted gross income, or MAGI (shameless plug for the ol' blog's glossary, which explains MAGI as well as many other tax term definitions) is $70,000 or less. That's the same income threshold as in 2021.
However, the student loan interest cut-off for married taxpayers who file joint returns is a bit bigger next year. In 2022, it will be $145,000. That's $5,000 more than this year.
If you make more than these amounts for your filing status, the loan deduction amount is reduced.
The loan interest deduction is eliminated in 2022 if your MAGI as a single taxpayer is $85,000 (the same as in 2021) or more or $175,000 for married joint filers (again, $5,000 more than in 2021).
Savings Bond exclusion for higher education: Savings bonds are another way to help pay for some higher education costs.
Interest earned on eligible Series EE and I bonds issued after 1989 is not taxed as long as the bond owner uses the redeemed bonds to pay qualified higher education expenses at an eligible institution.
In addition to meeting certain requirements, there's also an income limit for the education-related savings bond interest exclusion.
This exclusion will start phasing out in 2022 for those with MAGI of more than $128,650 on joint returns. That's an increase over the 2021 married filing jointly income mark of $124,800. For all other filers, the 2022 exclusion income cap is $85,800. This, too, is an inflation bump of the $83,200 for the 2021 tax year.
The tax-free savings bond interest exclusion is completely phased out in 2022 for joint filers with MAGI of $158,650 or more and $100,800 or more for all other taxpayers. For your 2021 returns, this phaseout applies to joint filers with MAGI of $154,800 and $98,200 for all other filers.
Lifetime Learning Credit: The Lifetime Learning Credit is great not just for full-time younger college students, but also covers continuing education courses once you're out of school, such as a class you took to improve your workplace skills.
This educational tax credit is worth a possible maximum of $2,000. However, that amount is reduced and ultimately phased out if you make what the IRS considers a lot of money. But the good news is that the earnings level at which the Lifetime Learning Credit is eliminated is adjusted for inflation.
In 2022, you can't claim this educational tax break if your MAGI as a single taxpayer is more than $80,000 or exceeds $160,000 if a married joint filer. Those amounts represent a nice hike over the 2021 income elimination levels of $69,000 for single filers and $139,000 for a jointly filing married couples.
Educators' expenses deduction: Tax breaks are for more than just students. Elementary and secondary school teachers, along with certain other educators, can claim some of their out-of-pocket classroom expenses as an above-the-line deduction. In fact, COVID-19 pandemic considerations prompted the addition of personal protective equipment (PPE) to the allowable classroom expenses list.
This tax break was made a permanent part of the tax code as part of 2015 tax extenders bill (formally known as the Protecting Americans from Tax Hikes or PATH Act). PATH set the baseline deduction at $250, but also initiated inflation tweaks to this amount. And for the first time since 2017, inflation has been enough to provide a bump in this tax break.
For the 2022 tax year, eligible educators can claim up to $300 of their personal payments for material to help them educate students. That's a $50 hike over the 2021 amount of $250.
Not that I or any teacher will complain about any tax break, even a modest one like this, but the truth is that this tax break generally isn't nearly enough to cover out-of-pocket classroom costs.
Small businesses pass-through break: Since the 2017 enactment of the Tax Cuts and Jobs Act (TCJA), aka the Republican tax reform bill, certain small businesses have been able to claim the Section 199A tax deduction.
The §199A tax break allows eligible businesses, known as pass-through entities, to deduct up to 20 percent of qualified business income, or QBI. Limits, however, apply based on biz income and type of business.
In 2022, the QBI threshold will increase to $340,100 for married couples filing joint returns, and to $170,050 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.
The QBI limitations are phased in as income increases and the tax break is not available once the pass-through taxpayer's MAGI in 2022 exceeds $440,100 for married couples filing joint returns, and to $220,050 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.
Next year's thresholds and ranges are increased from 2021's QBI amounts of $329,800 for married couples filing joint returns, topping out at $429,800, and from $164,900 to $214,900 for all other filing status owners of pass-through businesses.
Transportation fringe benefits: Commuting can tax your patience. Some companies countered this stress by offering their workers' a tax-free fringe benefit that covered some getting-to-and-from-work travels (and travails).
No more. Under the TCJA, through 2025 employers no longer can deduct fringe benefits offered commuting employees by subsidizing some or all of their parking, transit and van pooling costs. The new law also suspends bicycle commuting reimbursement from the definition of qualified transportation fringe benefits.
Some businesses, however, still have the option to offer workers the vehicular commuting benefits and cover the costs themselves.
In 2022, they can provide up to $280 a month to employees to offset their commuter highway vehicle travel, any transit pass or qualified parking. That's $10 more than the 2021 amount.
Retirement Saver's Credit: It's tough sometimes to save for retirement when you've got lots of other day-to-day expenses to meet. Uncle Sam wants to help encourage you to stash at least a little for your golden years via this special tax credit.
The Saver's Credit was noted in Part 3 of the 2022 inflation series, but since it's often overlooked, it deserves another mention here.
You can claim the Saver's Credit based on the money you put into IRAs and workplace (both as an employee or as the self-employed boss) plans. However, it's limited to folks who meet the annual earning requirements.
In 2022, the Saver's Credit maximum earnings caps go to:
- $34,000 for singles and married filing separately taxpayers,
- $51,000 for heads of household, and
- $68,000 for married couples filing jointly.
For this current 2021 tax year, just in case you're still looking for a reason to contribute, the Saver's Credit maximum earnings caps are:
- $33,000 for singles and married filing separately taxpayers,
- $49,500 for heads of household and
- $66,000 for married couples filing jointly.
Again, you can see exactly how the Saver's Credit is phased out based on income levels in the previously posted retirement inflation adjustments item.
More inflation info on the way: OK, ready to claim all these deductions, exclusions and credits? Or have your eyes glazed over?
Sorry about the amount of info here, but I hope at least some of them apply to your tax situation now or in the future and can help you cut your 2022 and 2021 tax bills.
As noted in the Retirement Saver's section and the intro to this post, more inflation changes are on the way as the 10-part 2022 tax inflation series continues. I'll continue breaking out and down more inflation figures in the coming days.
And as the box below indicates, you can find a directory to all 10 parts in the first post of the series. Thanks for reading and especially for your inflation explanation patience!
This post on 2022 tax deductions, credits and income exclusions
is Part 4 of the ol' blog's annual series on tax inflation adjustments.
The 10-part series started with a look at next year's income tax brackets and rates.
That first item also has a directory, at the end of the post,
of all of next year's tax-related inflation updates.
If, after perusing this post on deductions and credits, you want to check out
other inflation adjustments for 2022, you'll find the links, when posted, there.
Note: The 2022 figures in this post apply to that tax year's returns to be filed in 2023.
For comparison purposes, you'll also find 2021 amounts that apply to this year's taxes that,
pending any COVID-19 Tax Day delays like we've faced the last couple of years, will be due April 15, 2022.