'A lot of people are going to see less money in their pocket.' Here are must-know tax changes for 2022
- After another year of tax law changes, there are significant updates for the 2022 filing season, with the possibility of a smaller refund or bigger tax bill.
- For some filers, certain tax credits have been reduced and it may be more difficult to claim the charitable deduction.
- You may get Form 1099-K for the first time, which reports income from third-party networks.
After another year of tax law changes, there are significant updates for the 2022 season, with the possibility of a smaller refund or bigger bill for many taxpayers, experts say.
With many Americans facing reduced tax breaks, it's important to be proactive with year-end planning before the calendar winds down.
Here are some of the biggest changes taxpayers need to know, according to financial experts.
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Certain tax credits have been reduced
One possible reason for a smaller tax refund is the child tax credit and the child and dependent care tax credit have been reduced for 2022, explained certified financial planner Cecil Staton, president and wealth advisor at Arch Financial Planning in Athens, Georgia.
While both tax credits received a temporary boost through the American Rescue Plan of 2021, the enhanced tax breaks were not extended to this year. "The big picture is a lot of people are going to see less money in their pocket," Staton said.
In 2021, the child tax credit offered up to $3,600 per child under age 6, and up to $3,000 per child ages 6 through 17, with half available via upfront payments. But for 2022, the tax break reverts to the previous amount — up to $2,000 per child under age 17.
The child and dependent care tax credit, which may help offset the cost of care for children under age 13 or adult dependents, has also been reduced for 2022.
In 2021, the credit jumped to up to $8,000 for one qualifying person or $16,000 for two or more dependents. However, for 2022, those caps returned to $3,000 and $6,000, for one or multiple dependents, respectively.
You may get Form 1099-K for third-party payments
If you've received payments through apps like Venmo or PayPal in 2022, you may get Form 1099-K in early 2023, which reports income from third-party networks.
The form applies to business transactions, such as part-time work, side jobs or selling goods, according to the IRS.
Before 2022, the federal Form 1099-K reporting threshold was for taxpayers with more than 200 transactions worth an aggregate above $20,000. Now, however, the threshold is just $600, and even a single transaction can trigger the form.
Austin Chau, a CFP and wealth advisor at Menlo Asset Management in Menlo Park, California, said personal transactions like reimbursing your roommate for bills or dinner aren't taxable.
What's more, you'll only owe taxes on profits, he said. For example, if you spent $150 on concert tickets in 2022, and sold them for $200, the $50 profit is taxable, Chau said.
While the IRS says you shouldn't receive Form 1099-K for personal transfers, experts say it's possible, and the error may require you to contact the issuer or make adjustments to your tax return.
It's harder to claim the charitable deduction
Your tax refund may also be lower because it's more difficult to claim the charitable deduction in 2022.
Marguerita Cheng, a CFP and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, said you won't get a charitable tax break in 2022 if you don't itemize deductions on your return.
Congress gave charities a boost in 2021 by allowing single donors to claim a deduction for up to $300 for cash donations or $600 for married couples filing together, regardless of whether you itemize, said Cheng, who also is part of CNBC's Financial Advisor Council.
However, the tax break wasn't extended for 2022. Now, you'll only benefit if your itemized deductions, including the tax break for charitable gifts, exceeds the standard deduction, which is less common. In 2019, almost 90% of taxpayers used the standard deduction, according to the IRS.