Getting Ready for Tax Season – The Biggest Changes for the Upcoming Tax Year

What’s New for 2022?

One of the most consistent experiences of life also happens to be one of the least understood by the average person: taxes.

Many of us hear the word and shudder. We know taxes as an expensive series of documents, deductions, and payments. Our world is informed by what we pay and what we withhold. For many of us, tax season is a marathon filled with phone calls and emails with advisors, planners, and the IRS to make sure we have everything we need to be fully compliant with the law while also getting the most out of our payments.

An important thing to note about the US tax code is that it frequently changes year over year. For many people, this can add to the confusion. What may have worked as a deduction one year may not work as a deduction another. Brackets and income levels can adjust and change, and we may hold multiple jobs or start a home business, making a full accounting that much more difficult. While we can’t go into the full intricacies of the US tax code in this blog, we can break down the important changes to be aware of starting January 1st, 2022, for filing in 2023.

The biggest changes for 2022 include holdovers from the Tax Cuts and Jobs Act, passed in 2017. For example, the personal exemption deductions (deductions for yourself, your spouse, or your dependents) were eliminated on December 31, 2017, and are set to last through January 1, 2026. As a result, for 2022 you’re not allowed to claim a personal exemption. Similarly, the Tax Cuts and Jobs Act eliminated limitations on itemized deductions. While these changes first took effect several years ago, many people remain uninformed of the updates to the code.

Inflation adjustments occurred across the board. Standard deductions for married couples filing jointly for 2022 has risen from $25,100 to $25,900, an $800 increase. If you’re filing as a single taxpayer or married individuals who decide to file individually, the standard deduction has risen $400 to $12,950. For heads of households, the standard deduction for 2022 is up $600 to $19,400.

Marginal rates have changed. The top tax rate for 2022 remains 37% for single taxpayers with incomes exceeding $539,900 (or $647,850 for married couples filing jointly). As a reminder, the marginal tax rate is the amount of additional tax paid for every additional dollar earned as income.

Other rates (inflation adjustments) include:

  • 35% for incomes over $215,950 ($431,900 for married couples filing jointly)
  • 32% for incomes over $170,050 ($340,100 for married couples filing jointly)
  • 24% for incomes over $89,075 ($178,150 for married couples filing jointly)
  • 22% for incomes over $41,775 ($83,550 for married couples filing jointly)
  • 12% for incomes over $10,275 ($20,550 for married couples filing jointly)

The lowest rate is 10% for incomes of single individuals with $10,275 or less in income ($20,550 for married couples filing jointly).

The Alternative Minimum Tax Exemption for 2022 is $75,900 and starts to phase out at $539,900; this amount is $118,100 for married couples filing jointly for whom the exemption begins to phase out at $1,079,800. This is up from the 2021 exemption amount, which was $73,600 and phased out at $523,600 ($114,600 for married couples filing jointly for whom the exemption began to phase out at $1,047,200).

A good step to take, especially if you’re newly married or your filing status has changed, is to figure out how you’ll be filing and what your process will be for figuring deductions, brackets, and expenses. The sooner you can decide this, the better! Look up benefits and drawbacks for every filing status applicable to you.

Beginning in 2022, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $2,850. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $570, up $20 from 2021. Many of these changes are minor but can save money when used properly.

Changes at a glance include:

  • The foreign earned income exclusion for 2022 is $112,000, up from $108,700 in 2021.
  • Estates of decedents who die during 2022 have a basic exclusion amount of $12,060,000, up from $11,700,000 for estates of decedents who died in 2021.

Consult the IRS website for a full list of changes and adjustments for 2022 and beyond.

Key Strategies for the Year - and Beyond

While the tax code may have modifications each year, there are a few key steps and strategies that hold over for every year regardless of the code. For example, one of the best things to do at the beginning of the year is keep a comprehensive ledger and account of all tax related information and documents that might pertain to filing taxes. Many people start out the year with them or talk about doing it only to forget or gradually lose interest by the end. You’ll thank yourself mightily when it comes to filing in 2023 if you have complete records and arranged accounts that are easy to make sense of! Make organization of your tax documents a resolution for 2022.

Key steps include:

  • Keeping all information that comes in the mail, such as W2s, 1099s and other statements such as for mortgages. Keep everything that might be financially important—you never know when you’ll need it!
  • Be sure to keep receipts for business expenses during the year. Update them all in a spreadsheet if it’s easier for you to consistently do it over time instead of all at once at the end of the year, which can be a burden and a potential sorting headache.
  • Know the details on incomes from property, including rental property. Similarly, keep track of amounts paid for stock and amounts sold, if applicable. Be sure to communicate with your broker or financial advisor to have all relevant details.

One of the biggest changes over the last few years has been the COVID-19 pandemic. Many people not only changed jobs or started businesses but kept their current job while relocating to a home office instead of their past workplace. This involved updating home spaces to be home offices. For those who left jobs in late 2021 during the Great Resignation to start their own businesses from home for 2022, turning a room of your house into a home office can qualify you for a tax deduction.

Deductible business expense items include:

  • Computers
  • Software
  • Chairs, desks, and office supplies
  • Expenses related to maintaining the office in the space

Many people avoid home office deductions for fear of an audit. While it’s always possible, great records and accurate accounting can keep you out of any problems and get you safe deductions that you earned in pursuit of your business. The key is to be consistent and honest with your reporting. If, for example, you spent $500 renovating a single room of your house to be used exclusively as an office space (and IRS guidelines does state it has to be exclusively for business use), you’d be wise to write off that $500 and safe yourself the money.

If you’ve not already done so, this year is a great time to start filing your taxes electronically. Not only does this save time and money, but it also is easier and less of a hassle than paper documents. If you need more time to file your taxes, avoid a penalty by filing Form 4868 before the tax due date in April. Filing this simple form in time can save you accruing penalty and late charges for your taxes.

While taxes may be permanent, our habits around them don’t have to be. If we’ve struggled in the past with filing on time or keeping receipts, the best thing we can in 2022 is change those habits and get better at keeping account of our financial lives. It often doesn’t take more than a few minutes a day to record information that’ll make our tax process that much easier later. Excel, QuickBooks, and numerous other programs varying in price exist entirely for accounting purposes. If you’ve not done so, make 2022 the year you begin using them. If you need more help, consider a tax advisor or a personal financial planner to help guide you through the tax process.

As onerous as they may seem at first, by doing taxes and filing correctly you can actually save yourself money and live wisely with your current finances. Small updates can have big effects on your finances, which will really pay off over time. By doing tax season smart, you help yourself for years to come.