COVID-19. Financial Assistance information

Tax Year 2022

The year-end tax planning for 2022 looks a little different than 2021. Several of the coronavirus disease (COVID)-related tax provisions have been allowed to expire. The Inflation Reduction Act also made a variety of changes that impact 2022 taxes. Below is a summary of the highlights in recent tax law changes to help you plan.

Expired Tax Deductions and Credits

The enhanced Child Tax Credit enacted as part of the American Rescue Plan Act has so far been allowed to expire at the end of 2021. President Biden had proposed to extend it, but it has not yet been extended to 2022. The enhancements to the Dependent and Child Care Credit also expired at the end of 2021. Some of the Democratic proposals to extend the enhanced Child Tax Credit did not include extending the enhanced Dependent and Child Care Credit. The Earned Income Tax Credit was also expanded in the American Rescue Plan Act. Although some of those enhancements were made permanent, the expansions with respect to childless individuals expired at the end of 2021. President Biden did propose to extend those provisions, but again they have not yet been extended for 2022.

Charitable Deductions

The charitable deduction for non-itemizers was effective for two years, in 2020 and 2021, with some modifications made for 2021. It has been proposed to be extended; however, at this point it remains unavailable for 2022. Similarly, the expanded percentage deductions for itemizers and corporations have expired at the end 2021 and not yet been extended.

Extended Green Provisions in the Inflation Reduction Act

The Inflation Reduction Act extended several Tax Code provisions related to green energy that had expired at the end of 2021 or were being phased out. Highlights are listed below.

1. Plug-in Electric   Vehicle Credit. The Plug-in Electric Vehicle Credit, renamed the Clean   Vehicle Credit, contains several new requirements effective starting in 2023   or later. One new provision starting on the enactment date, August 16, 2022,   requires that the vehicle be assembled in North America. However, there is   also a transition provision that a vehicle purchased or subject to a binding   written contract entered into before August 16, 2022 may be treated as placed   in service on August 15, 2022 even though it was actually placed in service   on or after August 16, 2022.

2. The newly   renamed Energy Efficient Home Improvement Credit has been extended through   2022, with most of the new requirements and enhancements, particularly   changing a $500 lifetime credit to a $1,200 annual credit, effective for 2023   through 2032. This leaves a $500 lifetime credit available for 2022 for   taxpayers who had not already used up that credit.

3. The newly   renamed Residential Clean Energy Credit, the one for solar and wind   installations, had been scheduled to phase-down to 26 percent for 2022. It   has now been restored to 30 percent for 2022, with the 30 percent credit   extending through 2032, after which a phase-down starts again. One additional   change for 2022 and beyond is that the credit is no longer available for   biomass furnaces and water heaters.

Changes to Form 1040  Virtual currency/digital assets

The Form 1040 draft includes an expanded question on virtual currencies, which are referred to as digital assets in the updated question. Last year, the question was: "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?" The draft form for 2022 asks, "At any time during 2022, did you: (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)? (See instructions.)" 

Form 1099-K

There is no change to the taxability of income; the only change is to the reporting rules for Form 1099-K. As before, income, including from part-time work, side jobs or the sale of goods, is still taxable. Taxpayers must report all income on their tax return unless it is excluded by law, whether they receive a Form 1099-NEC, Nonemployee Compensation; Form 1099-K; or any other information return. The IRS emphasizes that money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable.

The American Rescue Plan Act of 2021 (ARPA) lowered the reporting threshold for third-party networks that process payments for those doing business. Prior to 2022, Form 1099-K was issued for third party payment network transactions only if the total number of transactions exceeded 200 for the year and the aggregate amount of these transactions exceeded $20,000. Now a single transaction exceeding $600 can trigger a 1099-K. Taxpayers may need to explain on the tax return the 1099-Ks that have been received that have not been reflected on the tax return.

Student Loan Forgiveness

President Biden has announced an expanded student loan forgiveness program. In most circumstances, the forgiven student loans should not be taxable as cancellation of indebtedness income in 2022.

Premium Tax Credit

The premium tax credit – also known as PTC – is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. To get this credit, you must meet certain requirements and file a tax return with Form 8962, Premium Tax Credit (PTC).

For tax years 2021 and 2022, the American Rescue Plan Act of 2021 (ARPA) temporarily expanded eligibility for the premium tax credit by eliminating the rule that a taxpayer with household income above 400% of the federal poverty line cannot qualify for a premium tax credit.

If you are expecting to receive a Form 1095-A, you should wait to file your income tax return until you receive that form. Some taxpayers may not receive a Form 1095-B or Form 1095-C by the time they are ready to file their tax return and it is not necessary to wait for Forms 1095-B or 1095-C in order to file. While the information on these forms may assist in preparing a return, they are not required.

Educator Deduction

One noteworthy inflation adjustment effective for 2022 is that the above-the-line educator deduction has finally been inflation adjusted to $300 for 2022.

Standard Mileage Rates

For 2022, there has been a mid-year adjustment to the standard mileage rates to address the increased inflation during the year. Business miles will have to be separated from January 1 – June 30 at 58.5 cents per mile and July 1 – December 31, 2022 at 62.5 cents per mile. Medical and moving rates are from January 1 – June 30 at 18 cents per mile and July 1 – December 31, 2022 at 22 cents per mile. The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute.

IRS Funding

The Inflation Reduction Act provided almost $80 billion to the IRS for enhancing enforcement, operations, technology, and customer service. Treasury Secretary Yellen has directed the IRS to not expand audits for individuals and businesses with incomes under $400,000 beyond historic audit rates. Since audit rates have been declining in recent years due to lack of funding, the reference to historic audit rates should permit the IRS to increase audit rates for these taxpayers at least back to historic levels. Secretary Yellen has also indicated that the funds should help the IRS do a much better job of responding to in-person and telephone inquiries during the upcoming tax filing season, as well as permit the IRS to automate the scanning of millions of individual paper tax returns and allow taxpayers to receive and respond to notices online. 

Fraudulent activity remains a significant threat

Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Beware if you:  

     Receive a notice or letter from the IRS regarding a tax return, tax bill or income that doesn’t      apply to you

     Get an unsolicited email or another form of communication asking for your bank account number, other financial details or personal information

     Receive a robocall insisting you must call back and settle your tax bill

Gift cards are never used to make tax payments

Keep your personal financial information safe.  
 

Additional tax and retirement planning considerations

· Make the most of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs and company retirement plans. 

· Consider tax benefits related to using capital losses to offset realized gains –– and move any gains to the lowest tax brackets, if possible. 

· Make sure you’re appropriately planning for estate and gift tax purposes. There is an annual exclusion for gifts ($16,000 per donee, $32,000 for married couples) to help save on potential future estate taxes. 

· Consider a VT529 plan to help save for education; you can benefit with a 10% Vermont state income tax credit on annual contributions deposited for college or training after high school.

· Take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for your future.

· Review withholding and estimated tax payments and assess any liquidity needs. 

If you have any questions related to your year-end tax planning, please contact me.