Thus far, overarching changes to the tax code have been avoided in 2022 - likely because it’s an election year. The most impactful changes for 2022 relate to the expiration of changes and the rising cost of living. Several COVID-related business deductions and credit enhancements expired at the end of 2021. Others will disappear at the end of 2022. Mandatory inflation adjustments increased 2022’s marginal tax brackets, the standard deduction, retirement contribution limits, and – although it’s not tax-related – social security benefits.
Although the year did not see sweeping tax legislation, the Inflation Reduction Act (signed into law on August 16th, 2022) made some noteworthy changes that may impact your taxes and planning. Although it has little to do with inflation reduction, it does extend a COVID-related health insurance subsidy provision and increase incentives related to energy-efficient home improvements and purchasing an electric vehicle.
Business-wise the Inflation Reduction Act imposes a 1% excise tax on corporate stock buybacks and a corporate minimum tax rate of 15% for businesses with average annual “net incomes” over $1 billion. Although touted as a measure to ensure large corporations pay their fair share, – in reality, the minimum tax is more of a timing change. Once paid, companies receive a credit to offset future assessments.
I found one aspect of the Inflation Reduction Act fascinating, considering gas prices and the US’s shortage of refinery capacity. The act reinstates a long-dead petroleum excise tax on crude oil received at a US refinery (paid by the refinery’s operator) and on petroleum products entering the US for consumption, use, or warehousing. The excise tax originally expired in 1995. The tax is 16.4 cents per barrel, adjusted for inflation.
Corporate excise taxes may pose attractive tax-pro reading, but you're not here for that. Let’s focus on changes that will impact your tax return.
If you need to purchase equipment for your business, you might want to do so by the end of 2022. Bonus Depreciation allows 100% expensing of purchased equipment (there are limits on most passenger vehicles) in 2022.
On January 1st, 2023, however, the bonus percentage drops to 80%. Then, it falls each year until disappearing entirely in 2026 (Will it? Probably not).
Currently, used equipment qualifies for Bonus Depreciation as long as it is “new” to the taxpayer. Also, it is essential to note that Bonus Depreciation can generate a loss on your business return and offset other income. Another expensing tool, the Section 179 Expense, cannot.
For 2022, business meals provided by a restaurant are 100% deductible. In 2023, they return to 50% deductibility. Also, the IRS recently clarified some confusion regarding the travel meal per diem expense, which is generally limited to 50%. For 2021 and 2022, the portion of the daily allowance for meals (approximately $64 per day for most areas) is 100% deductible. For 2023, the deductible portion returns to 50%.
In 2021, many parents enjoyed a Child Tax Credit boost of $1,000 per qualifying child ages 6 to 17, from $2,000 to $3,000. Plus - kids ages five and younger received an additional $600 bump, making their credit $3,600 each!
For 2022, the credit returns to $2,000 per qualifying child, ages 16 and younger – note the age was 17 for 2021. On the tax-pro positive side, there were no advance credit payments in 2022 for many clients to forget and others to owe taxes.
Another change - in 2021, the Child Tax Credit was completely refundable. You received the credit even if you owed no tax on your returns. In 2022, refundability is gone for most clients. The credit will reduce your tax liability but won’t generate a refund - once your tax reaches zero, the credit’s gone.
This credit offsets the cost of caring for a dependent child under the age of 13 (age 12 and younger) or a disabled dependent/spouse while you work.
Changes in 2021 dramatically increased the refunds of many working parents who paid for childcare. Families whose income was under $125,000 received a credit worth 50% of daycare costs up to $4,000 for one child/dependent and $8,000 for two or more children. Also, like the Child Tax Credit, in 2021, it was fully refundable, meaning they received the money even if they owed no tax!
For 2022 (and 2023), the Child and Dependent Care Credit reverts to its 2020 level. The maximum credit is 35% of child & dependent care costs for families earning less than $15,000, and it maxes out at $1,050 for one child and $2,100 for two or more.
When income reaches $15,000, the credit percentage drops on a sliding scale until it hits $45,000. Once here, it drops to 20% for a maximum credit of $600 for one child and $1,200 for two or more. When income reaches $438,000, the credit is no longer available.
For 2022, refundability is also gone – the credit can offset tax due but cannot generate a refund.
Inflation increased marginal tax brackets by an average of 3.3% above 2021. The tax brackets range from 10% to 37%, depending on taxable income. Below are 2022’s federal tax brackets.
For planning purposes, it is crucial to understand that when income increases, it gets taxed at your marginal tax rate. For instance, let’s say you’re single, and your taxable (not total or household) income is $50,000. In December, you receive a $10,000 bonus from your job. Because income before and after the bonus falls in the 22% marginal bracket (see table below), the additional compensation gets taxed at 22% (plus state tax, if applicable). You should budget owing $2,200 more in federal tax.
| Tax Rate |
For Single Filers |
For Married Individuals Filing Joint Returns |
For Heads of Households |
| 10% |
$0 to $10,275 |
$0 to $20,550 |
$0 to $14,650 |
| 12% |
$10,276 to $41,775 |
$20,551 to $83,550 |
$14,651 to $55,900 |
| 22% |
$41,776 to $89,075 |
$83,551 to $178,150 |
$55,901 to $89,050 |
| 24% |
$89,076 to $170,050 |
$178,151 to $340,100 |
$89,051 to $170,050 |
| 32% |
$170,051 to $215,950 |
$340,101 to $431,900 |
$170,051 to $215,950 |
| 35% |
$215,951 to $539,900 |
$431,901 to $647,850 |
$215,951 to $539,900 |
| 37% |
$539,901 or more |
$647,851or more |
$539,901 or more |
The Tax Cut and Jobs Act of 2017 doubled the standard deduction, resulting in fewer Americans itemizing deductions on Schedule A. The standard deduction also gets adjusted for inflation. Here’s a breakdown of 2022’s standard deduction compared to 2021’s based on filing status.
Single: $12,950 ($12,550 in 2021)
Married Filing Jointly & Qualified Widow(er): $25,900 ($25,100 in 2021)
Married Filing Separately: $12,950 ($12,550 in 2021)
Head of Household: $19,400 ($18,800 in 2021)
Over Age 65 or Blind: Add $1,400 per spouse who qualifies. This amount was $1,350 for 2021. If you file Single or Head of Household, it bumps up to $1,750 (1,700 in 2021).
The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increased to $20,500 for 2022. For 2023, allowable contributions will increase to $22,500.
Traditional and ROTH IRA limits remain at $6,000 for 2022 and $7,000 for those 50 or older by the end of 2022. For 2023, these amounts increase to $6,500 and $7,500 for those 50 or older. Income thresholds and phaseouts also received inflation boosts for 2022 and 2023.
SEP contributions limits also increased for 2022 and 2023. For 2022, the limit is $61,000 (2021's limit was $58,000), up to 25% of employee earnings or profit of the self-employed. For 2023, the limit jumps to $66,000 due to inflation.
Social Security is pegged to inflation by statute and increases annually to reflect the higher cost of living. For 2022, those receiving Social Security received a 5.9% increase in monthly benefits. In 2023, they will receive an 8.7% cost of living adjustment. 2023’s COLA is the second-highest on record. The record is held by 1981 when inflation boosted benefits by 11.2%!
Generally, individuals and families with household incomes over 400% of the poverty rate (based on zip code and family size) could not qualify for government health insurance credits. The Inflation Reduction Act waived this cap through 2025. For 2022, individuals and families over 400% of the federal poverty level can receive health insurance assistance and not pay more than 8.5% of household income for health insurance.
For example, a family of four lives in Berkeley County, WV. They have a household income of $125,000, which is 450% of the poverty level, 50% higher than the limit. The premium they must pay out-of-pocket cannot exceed 8.5% of their income. That’s $10,625 per year or $885 per month. Their share may seem like a lot (and it is – since the passage of the Affordable Care Act, health insurance costs have risen by 60%), but the premium for a family this size is $2,354 per month, and they still qualify for a monthly subsidy of $1,469!
Market Place Warning: Be very careful when applying for coverage. A trap lurks inside the marketplace calculator, and I have seen it spring on many unexpecting families. If your income winds up being higher than what you entered when applying, you may end up with a HUGE tax bill.
Consider the family mentioned above. Rick and Donna have two children, ages 10 and 12. When they apply for coverage for the following year (2022), only Rick is working, and he earns $60,000 per year. They enter the $60,000 into the calculator and receive a credit of $2,222 per month. Their share of the cost is $133 per month. In 2022, Donna gets a job and earns $25,000. Their household income jumps to $85,000.
Want to guess what happens when they complete their 2022 tax return? They must repay $3,636 of the credit. Why? Because based on an income of $85,000, they only qualified for a credit of $1,918 per month. They must repay the rest! Worse, yet, they would owe a lot more if it wasn’t for the 8.5% cap!
The lesson - you do not see the money provided by this credit. It goes directly to the insurance company, making it easy to forget. Be careful when applying, especially if you’re a business owner whose income swings widely yearly.
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