Many Taxpayers Will See Smaller Refunds This Year
Article Highlights:
Child Tax Credit
Dependent Care Benefits
Recovery Rebates
Employee Retention Credit
Congress has for years used the tax return as a means of providing benefits to taxpayers in need and incentives to stimulate activities in business, as well as addressing environmental issues. So when COVID-19 hit, Congress and many state governments provided tax benefits to help citizens through the pandemic. Because the COVID pandemic-related benefits have come to an end, your tax refunds may be smaller this year, and substantially smaller for many. The following is a rundown of some areas where decreases in federal tax benefits will affect taxpayers’ 2022 tax refunds.
Child Tax Credit:
2021 - Taxpayers with children enjoyed an enhanced and refundable tax credit of $3,000 per child under the age of 18 ($3,600 if under age 6) per child in 2021.
2022 – The credit has reverted to 2020 levels and the maximum credit for 2022 is $2,000 per qualifying child, of which the maximum refundable amount is $1,500 per child in certain situations. In addition, the credit only applies to children under the age of 17.
Non-refundable tax credits can only be used to offset tax liability and any excess is lost. On the other hand, a refundable credit offsets tax liability and any excess is refundable.
In addition, the child tax credit has always phased out for higher income taxpayers. For 2021 the phaseout thresholds were substantially increased as illustrated in the table. However, that increase was for 2021 only and the thresholds have reverted to 2020 levels for 2022.
CHILD & DEPENDENT TAX CREDITS PHASEOUT THRESHOLDS | ||
|---|---|---|
Filing Status | 2022 | 2021 |
Married Joint or Qualifying Widow | $400,000 | $150,000 |
Married Separate | $200,000 | $75,000 |
Head of Household | $200,000 | $112,500 |
Single | $200,000 | $75,000 |
Dependent Care Benefits: The tax code provides a tax credit to help working taxpayers that pay care expenses for their children and other qualifying individuals. The credit is a percentage of the dependent care expenses incurred, but those expenses are limited to specific amounts and the taxpayer’s income from working. The credit percentage also declines for higher income taxpayers.
2021 – The credit was fully refundable, and the credit was a flat 50% of the allowable expenses up to $8,000 for one and $16,000 for two or more qualified individuals. Thus the credit could be as much $4,000 for one and $8,000 for two or more qualified individuals. The 50% credit rate began to phase out when the taxpayer’s AGI reached $125,000, but the rate wasn’t reduced below 20%.
2022 – The credit is not refundable, and the credit rate ranges from a high of 35% to a low of 20% (see table) of the allowable expenses up to $3,000 for one and $6,000 for two or more qualified individuals.
AGI Adjusted Applicable Percentage (Other Than 2021) | |||||
|---|---|---|---|---|---|
AGI Over | But Not Over | Applicable Percent | AGI Over | But Not Over | Applicable Percent |
0 | 15,000 | 35 | 29,000 | 31,000 | 27 |
15,000 | 17,000 | 34 | 31,000 | 33,000 | 26 |
17,000 | 19,000 | 33 | 33,000 | 35,000 | 25 |
19,000 | 21,000 | 32 | 35,000 | 37,000 | 24 |
21,000 | 23,000 | 31 | 37,000 | 39,000 | 23 |
23,000 | 25,000 | 30 | 39,000 | 41,000 | 22 |
25,000 | 27,000 | 29 | 41,000 | 43,000 | 21 |
27,000 | 29,000 | 28 | 43,000 | No Limit | 20 |
Recovery Rebates - As a means of providing financial assistance to individuals during the COVID pandemic, Congress authorized Recovery Rebate Credits (also referred to as economic impact payments) for the 2020 and 2021 tax years.
2021 - The rebates, which generally were issued by the federal government during the year but which may have been claimed on the 2021 tax return, were:
o $1,400 ($2,800 for joint filers)
o $1,400 per dependent
2022 – There were no rebates
Employee Retention Credit – As the title implies, this is a credit whose purpose was to help employers retain employees on payroll even though the employer’s business was in decline because of COVID.
2021 – The payroll credit was 70% of qualified wages up to $10,000 per employee for any quarter 1/1/21 through 9/30/21 or 12/31/21 for Recovery Start-Ups.
2022 – There is no longer a credit for years after 2021.
As you can see there have been some significant reductions of tax benefits that can have a substantial impact on your refund for 2022. Please contact this office if you have questions or would like to adjust your withholding to alter your refund for 2023.
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Frequently Asked Questions
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You can prepare your taxes yourself, especially if your business is simple.
But once you have contractors, employees, business loans, equipment purchases, mileage, mixed expenses, or growing revenue, things get more complex. At that point, tax preparation becomes a way to make sure your business is reported correctly, your deductions are handled properly, and your records can support what you file.
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Send anything that shows what your business earned, spent, bought, paid, borrowed, or changed during the year.
That usually means your income records, bank statements, credit card statements, payroll reports, contractor payments, loan documents, mileage records, and prior-year tax return. Also tell me about anything unusual, such as buying a vehicle, hiring someone, opening a new location, or taking out a business loan.
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Messy books can slow things down. If expenses are in the wrong categories, transactions are missing, or personal and business spending are mixed together, your tax return may not show the right profit. We may need to clean things up before filing, so your return is accurate and easier to support.
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Possibly, if it was truly for your business and you have proof.
Still, it is much better to avoid this when you can. A separate business bank account and business credit card make everything cleaner. They save time, reduce confusion, and make your records much easier to defend if anyone ever asks questions.
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Most small business owners can deduct ordinary business expenses like software, advertising, supplies, insurance, rent, payroll, contractor payments, professional fees, travel, and some vehicle costs.
The question I usually ask is simple. Was this expense clearly for the business? If yes, we can look at how it should be handled. Personal expenses should stay personal.
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