The time is now to start preparing for tax season as 2022 draws closer. Even though your federal tax returns aren’t due until April 18, 2023, several tax changes in 2022 will probably affect how much money you get back in the form of a tax refund.
The end of 2021 saw the conclusion of many substantial tax benefits from recent years, including the enlarged child tax credit, the child and dependent care credit, and stimulus payments. As a result, this year’s refund might be a little less than usual. Additionally, you might discover that you owe taxes this year if you began a side business or freelance employment.
Additionally, a few new rules were implemented. PayPal, CashApp, and Venmo, among other third-party payment platforms, will now report freelancers’ annual income to the IRS.
If approved, student loan forgiveness would be tax-free on the federal level. However, some states would have tax obligations for borrowers. Finally, the IRS wants to know if you engaged in any cryptocurrency activities in the previous year.
Income Tax Bracket for 2022
Along with the inflation rate, the standard deduction typically rises yearly. The standard deduction has been raised for the tax year 2022, going from $12,950 for single taxpayers to $25,900 for married couples filing jointly (an increase of $800).
The income tax bands were also increased for 2022 to reflect inflation. Your income bracket is based on your adjusted gross income, which is the money you make before taxes are deducted but before itemized deductions and tax credits are applied.
Even if the adjustments were minor, if you were in a higher tax bracket at the bottom in 2021, you might have been moved to a lower rate for your 2022 tax return.
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Child Tax Credit Benefits Have Changed
While the child tax credit temporarily increased in 2021 to allow for additional dependent children and advance payments, this is not the case for your 2022 taxes.
The CTC is now only available to children under the age of 17 and has been reduced to its pre-pandemic level of $2,000 per kid or dependent. For certain parents with lower incomes, the credit is now only partially refundable from last year, and advance payments are no longer available.
Eligible Recipients of Child Care and Dependent Tax Credit Will Decrease
Temporary enhancements to the Child Care and Dependent Tax Credit were made in 2021 as well. Those earning $125,000 or less were able to deduct 20% to 50% of their $4,000 (or $8,000 for parents of multiple children) in eligible childcare expenses. It was refundable as well.
This tax benefit has also been restored to its prior level for 2022. Now, parents of a single kid are only permitted to deduct up to $1,050 in eligible expenses or 35% of a maximum of $3,000 in expenses. A maximum of $2,100 can be claimed for up to 35% of up to $6,000 in qualifying expenses by parents of multiple children.
The income qualification makes the most difference. The income criterion for 2022 is $15,000 or less, which is a significant decrease from the $125,000 income requirement for 2021, while households making up to $438,000 will still be eligible for at least some credit.
Crypto and NFT Transactions
Although not entirely new, the IRS is stepping up its tracking of bitcoin sales and swaps for 2022. A taxable event occurs each time you exchange, sell, or buy something using cryptocurrency.
Cryptocurrency is currently liable to short- or long-term capital gains taxes because it is taxed similarly to property. This implies that you can disclose any cryptocurrency losses to help balance out any gains. Since cryptocurrencies like bitcoin and Ethereum suffered a sharp decline in value in 2022, you might be able to lower your tax bill by reporting your capital loss if you sold or traded your cryptocurrency at a loss. The same is true of NFTs.
Third-Party Apps will Report Payments to the IRS
If you’ve been working for yourself or as a freelancer for a while, you’re probably already aware of the IRS’s requirement that you disclose your freelance income. Because third-party payment applications are now reporting your payment activity to the IRS, the IRS will have even more access to your revenues this year.
The IRS will be able to compare the amounts you report to the transactions the payment apps give, even though you must still disclose your profits as usual. The IRS will therefore be aware if you are $100 off.
Freelancers may benefit from this new regulation. Users will receive 1099-K forms from platforms like PayPal, Venmo, Cash App, Zelle, and others. It can help make disclosing your income a little simpler.
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