We have just completed the second tax year of heavily pandemic-influenced tax and business legislation, which included some highly unusual provisions that impacted both individuals and businesses. Although the “Infrastructure Investment and Jobs Act,” which passed in November, and the Build Back Better Act, which was not enacted, once included significant sweeping tax law change proposals, these changes were ultimately removed from the bills. As a result, 2022 tax law looks similar to 2021. Here are a few things to keep in mind.
- The child tax credit for 2021 was expanded and advanced to taxpayers on a monthly basis, beginning in July. For taxpayers under certain income levels, the credit amount was increased. Unless you and your spouse opted out, you would have received half of the credit you were eligible for based on your most recent return. This advance will certainly impact your balance due at the end of the year and it will be necessary for us to account for the amount already received by you on your 2021 1040. Fortunately, the IRS has announced that they will issue Letter 6419 in January 2022 to provide the total payments that were disbursed to you. Please retain this letter with your other tax documents and be sure to share it with us.
- The final economic impact payment occurred in 2021 and will likewise have to be accounted for on your tax return. The IRS will send Letter 6475 to provide the amount you received. This letter will need to be submitted to us as well.
- The standard deduction rises to $12,550 for single filers and $25,100 for married couples. Many taxpayers may need to take the standard deduction and itemize in alternating years to maximize tax savings. For example, consider making a large amount of charitable contributions in one year and minimizing contributions the next year. Alternatively, look into a donor-advised fund which will allow you to time your deductible contributions to maximize tax savings while still controlling the timing of the distribution to your church and/or favorite charities.
- If you don’t itemize, you may still deduct charitable contributions of $600 for married couples and $300 for single individuals. And don’t forget about Mississippi! While the current tax law reduces the number of federal itemizers, Mississippi’s low standard deduction amounts will ensure that most taxpayers will itemize in Mississippi, whether or not they do on their federal returns. This means that you will still need to keep up with and submit your medical expenses, mortgage interest, property taxes, and charitable contributions to save state income taxes.
- Despite early proposals, long-term capital gains and dividends are still taxed at 0%, 15%, or 20%, depending on the taxpayer’s taxable income. The 0% rate generally applies when taxable income is up to $80,800 on a joint return and $40,400 for singles. Keep this in mind when timing sales of capital assets held for over one year.
- For businesses and self-employed individuals, business meals are 100% deductible for 2021 and 2022. The food or beverages must be provided to a current or prospective customer, client, supplier, employee, agent, partner, or professional adviser with whom you could reasonably expect to engage or deal in your business. Remember that entertainment expenses are no longer deductible.
- If you are age 70-1/2 or older by the end of 2021, have traditional IRAs, and particularly if you can’t itemize your deductions, consider making charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible as an itemized deduction.
- In 2020 and 2021, Congress enacted the Employee Retention Tax Credit for businesses that were impacted by government shutdowns or had significant drops in revenue. This is a payroll tax credit claimed on wages paid through September 2021. For self-employed individuals, credits are available on the 2021 1040 related to missing work due to having Covid or caring for someone with Covid. Please let us know if you think you may qualify for either credit.
- Businesses should consider making expenditures that qualify for the liberalized business property expensing options. Expensing is generally available for most depreciable property (other than buildings), including qualified improvement property, roofs, and HVAC, fire protection, alarm, and security systems. Thus, property acquired and placed in service in the last days of 2021 can result in a full expensing deduction.
- If you have a trade or business, you are required to send Forms 1099 to recipients of payments for services, interest, and rents, if such payments total more than $600 for the year. Payments to corporations (Not LLCs) are not required to be reported unless the corporation is an attorney or a health care provider. The deadline for sending 1099s to the recipients, IRS, and State is January 31, 2022. Failure to file these forms on time can result in significant penalties.
There are countless other new rules and limitations that may have a significant impact on your income tax liabilities. Please call us any time to discuss your specific situation.