The 2022 tax season is upon us! To help relieve any additional stress when it comes to collecting your tax documents, I want to provide some quick reminders:
In most tax situations, taking the standard deduction is more practical and also saves the hassle of keeping track of receipts. After the inflation adjustment for 2022, the standard deductions for those filing as single is now $12,950, head-of-household filers now get $19,400, and married filing jointly is now $25,900. Taxpayers who are over age 65 can add an additional $1,400 to their standard deduction, and this number rises to $1,750 if they are also unmarried or not a surviving spouse. Most individuals will take the standard deduction, but if you have enough tax-deductible expenses, you might benefit from itemizing.
Here is a list of the larger itemized deductions to keep in mind for 2022:
State and local taxes: The deduction for the total of state and local income taxes, property taxes, and real estate taxes is capped at $10,000 aggregately.
Mortgage interest deduction: Mortgage interest tends to be the largest itemized deduction. The deductibility of interest is currently limited to $750,000 of acquisition indebtedness. However, people who had $1,000,000 of home mortgage debt on or before December 15, 2017, will still be able to deduct the interest on that loan.
Medical expenses: Only qualifying medical expenses that exceed 7.5% of a taxpayer’s adjusted gross income (AGI) can be deducted.
Charitable donations: The cash donation limit of 60% of AGI is back in place starting with the 2022 tax year, and donations must be made to qualifying charitable organizations. Contributions of non-cash assets are limited to 30% of AGI for 2022.
Cash Gifts to Charities
During the COVID pandemic, the IRS allowed taxpayers to reduce their gross income by up to $300 (or $600 if married filing jointly) with a special write-off for cash gifts to charitable organizations if you claimed the standard deduction. However, this above-the-line deduction has unfortunately expired and is not available for the 2022 tax year. If an individual itemizes for the tax year, you will still be able to claim your charitable deductions.
Child Tax Credit
For the 2021 tax year, the American Rescue Plan Act expanded the Child Tax Credit significantly to provide some pandemic relief. However, the Child Tax Credit will revert back to the $2,000 per dependent under age 17 benefit for 2022. This is down from the $3,600 credit for children under age six or $3,000 credit for children under age 18 in 2021. The credit is also subject to a phase-out starting at $200,000 for single filers and $400,000 for those married filing jointly and is only refundable up to $1,400. For other qualified dependents, you can still claim a $500 credit.
Each year, tax season should act as a reminder to review your retirement savings strategies and make your contributions to either your traditional IRA or Roth IRA. The 2022 contribution limit stays at $6,000, plus $1,000 as an additional catch-up contribution for individuals aged 50 and up. You have until April 18, 2023, to make your contributions for the 2022 tax year, so do not wait any longer. Make sure to consult your advisor if you should take advantage of reducing your taxable income by contributing to your traditional IRA, or if it is more beneficial to contribute to a Roth IRA and let your investments grow tax-free.
Qualified Charitable Distributions (QCD’s)
We love that our clients have such a strong desire to give to charitable organizations. Once you reach age 70 ½, you can begin giving out of your IRAs without paying tax on the distributions. At Stewardship Advisors, we emphasize that all your giving should be done out of your IRA when you reach the eligible age. If you are choosing to give, why not choose to use your IRA and save taxes on your hard-earned money so more can go to charity? That being said, make sure you keep track of your Qualified Charitable Distributions out of your IRA so you can correctly report the amount to the IRS come tax time. The IRS is not keeping track of whether or not the IRA distributions are going to charitable organizations or directly into your pockets.
As always, having a good relationship with your tax preparer and financial advisor can help alleviate confusion and reduce your tax liability. These are the key reminders to a successful 2022 tax season, but if you have any additional questions about your tax return this year, we would be glad to help point you toward the best solution.
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