The IRS has announced fairly normal dates for the 2022 tax filing season, starting January 24, 2022 and ending April 18, 2022. However, the IRS also predicted problems for the tax season: delayed processing of tax returns, delayed refunds, and limited phone support. The IRS encouraged taxpayers to file early and file electronically. There are also several new issues on the tax return this year.
Child Tax Credit
The Child Tax Credit is larger this year, up from $2,000 to $3,600 for children under age 6 and to $3,000 for children age 6 through 17. Half of the credit may have been paid in advance payments from July through December, 2021. Taxpayers should receive Letter 6419 from the IRS to document the amount of advance credit received. Aside from a safe harbor up to $2,000 per child for lower income taxpayers, taxpayers that received more advance payments than they are entitled to on the tax return, the difference must be repaid. This could result in some taxpayers being under withheld. There is a separate income phase-out for the increased amount of the credit from the phase-out for the original $2,000 credit. The credit is fully refundable.
Economic Impact Payments
The third round of Economic Impact Payments were also received in 2021, up to $1,400 for the taxpayer and dependents, including non-child dependents. Letter 6475 should be received by the taxpayer from the IRS documenting the amount of the third round of payments received in order to calculate the Recovery Rebate Credit on the tax return. As was the case on 2020 tax returns, taxpayers do not need to repay excess Economic Impact Payments received. Taxpayers should not include the second round of Economic Impact Payments which may have been received in early 2021, since those related to the 2020 tax return.
Earned Income Tax Credit
More childless taxpayers will be eligible for the Earned Income Tax Credit, with an expansion of the age limits, the income limits, and the dollar limits. The investment income limit has also been significantly raised. Separated individuals and individuals whose children do not have Social security numbers may now more easily qualify for the credit. As was the case in 2020, taxpayers may still elect to use 2019 income rather than 2021 income if 2019 earned income is larger.
Child and Dependent Care Credit
For 2021 tax returns, the percentage limit for the Child and Dependent Care Credit is increased from 35 percent to 50 percent, the allowable expenses are increased, the income phase-out range is increased, and it is fully refundable. However, there is now a full phase-out starting at incomes above $400,000, so some wealthier taxpayers who qualified in the past may no longer qualify. Taxpayers who now qualify for the credit for the first time may have to work to assemble taxpayer identification numbers from daycare providers.
Premium Tax Credit
The Premium Tax Credit should also be available to a larger number of taxpayers on 2021 tax returns and potentially in a larger amount. The credit may also be available based on unemployment compensation received.
The enhanced charitable contribution deductions available in 2020 are also available on 2021 tax returns with a couple of modifications for non-itemizers. The non-itemizer deduction is a below-the-line deduction for 2021 and also the maximum deduction is doubled to $600 for married filing jointly taxpayers.
Tax law changes clarify that COVID expenses can be allowed for the above-line-deduction for educator classroom expenses; as medical, flexible spending account and health savings account expenses; and to support penalty-free distributions from retirement plans.
Business Meals Deduction
For 2021 and 2022, the business meals deduction for both food and beverages is increase to 100 percent in provided by a restaurant, which may be consumed on the premises or delivery or take-out.
Tax law changes have clarified a number of exclusions from tax, including for student loan forgiveness, financial aid grants to college students, Economic Injury Disaster Loans, and Restaurant Revitalization Grants.
SALT Deduction Limit
The limit on the state and local tax deduction remains currently as $10,000 for 2021. However, the House version of the Build Back Better bill had proposed a retroactive increase in the limit to $80,000. Also, many states have enacted statutes permitting an unlimited deduction if the tax is paid by a pass-through entity.
Education Tax Breaks
The tuition and fees deduction has been repealed for 2021 tax returns. However, the income phase-out limits for the Lifetime Learning Credit have been increased to match the phase-outs for the American Opportunity Tax Credit.
Cryptocurrency and Non-Fungible Tokens
A cryptocurrency question remains on the 2021 tax return but is somewhat modified from 2020: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” Although there is no clear guidance at this point from the IRS on the tax treatment of Non-fungible Tokens. Many commentators feel, absent other guidance, NFTs should be treated in a similar way to cryptocurrencies.
Other Business Tax Changes
Many of the COVID relief provisions enacted in 2020 with respect to net operating loss carrybacks and deductions, the business interest deduction limitation, payroll tax changes and excess business losses of noncorporate taxpayers expired at the end of 2020 and are not available for 2021 tax returns.