Tax law changes in 2022
January 10, 2023
We hope you have had a wonderful holiday season and a great start to the New Year. As we plan for the 2022 tax season, we thought about sharing the key tax law changes that will impact individuals and small businesses. Major federal tax breaks were enacted in the 2020 & 2021 tax years, but most expired at the end of 2021. North Carolina also made some positive changes this year.
Key State and federal tax law changes in the year 2022
North Carolina
- For the Tax Year 2022, the North Carolina individual income tax rate is 4.99%, down from 5.25% last year. The rate will gradually reduce to 3.99% by the year 2029.
- The NC corporate income tax rate stays the same as last year, i.e., 2.5%. The rate will be phased out over a five-year period beginning on or after January 1, 2025. The current tax rate of 2.5% will drop to 2.25% in 2025, 2% in 2026, 1% in 2028, and 0% in 2030.
- NC law was amended to allow certain pass-through entities ("PTEs") to elect to pay North Carolina income tax at the entity level. This is a workaround to the State & local tax (SALT) deduction cap of $10,000 for individual taxpayers enacted as part of TCJA in 2018. Under the TCJA, the SALT cap imposes a $10,000 limit for federal deductions allowed on individual taxpayer returns for state and local taxes. A pass-through entity elects to pay state-level taxes at the entity level rather than passing on the full tax liability to individual owners, with a state tax credit to individual owners for state taxes paid by the entity. The entity not subject to the SALT cap can claim a federal business expense deduction for such. taxes
Federal
- The federal marginal tax rates didn't change, but the income tax brackets for 2022 are slightly broader than for 2021.
- 37% for individual single taxpayers with incomes higher than $539,900 ($647,850 for married couples filing jointly).
- 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).
- 10% for single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).
- The standard deduction, 401K contribution & HSA contribution were increased in 2022 to account for inflation
- The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $20,500, up from $19,500.
- The HSA contribution limits for 2022 are $3,650 for self-only coverage and $7,300 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution
- The standard deduction for married couples filing jointly for the tax year 2022 rises to $25,900, up $800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 for 2022, up $400, and for heads of households, the standard deduction will be $19,400 for the tax year 2022, up $600.
- Child Tax Credit, Earned Income tax credit, and Child and Dependent Care Credit
- If eligible, those who got $3,600 per dependent in 2021 for the CTC will get $2,000 for the 2022 tax year.
- Eligible taxpayers with no children who received roughly $1,500 in 2021 will now get $500 in 2022.
- The Child and Dependent Care Credit will return to a maximum of $2,100 in 2022 instead of $8,000 in 2021.
- Above-the-line deduction: In 2021, taxpayers could take up to a $600 charitable donation tax deduction on their tax returns. However, in 2022, those who take a standard deduction may not take an above-the-line deduction for charitable donations.
- Premium tax credit: In 2021, you were considered to have met the premium tax credit's household income requirements for the 2021 tax year if you (or your spouse if you filed a joint return) received or were approved to receive unemployment compensation for any week in 2021. However, if you received unemployment benefits in 2022, you must satisfy all the normal eligibility requirements.
- There are no stimulus check payments in 2022. As a result, there is no recovery rebate credit for the 2022 tax year.
- Tax rates on long-term capital and qualified dividends did not change for 2022. However, the income thresholds to qualify for the various rates were increased to account for inflation. This means you can qualify for a lower rate with a higher income bracket.
Capital Gains Taxable Income Taxable Income Taxable Income Taxable Income
Tax Rate (Single) (Married Filing Separate) (Head of Household) (Married Filing Jointly)
0% Up to $41,675 Up to $41,675 Up to $55,800 Up to $83,350
15% $41,675 to $459,750 $41,675 to $258,600 $55,800 to $488,500 $83,350 to $517,200
20% Over $459,750 Over $258,600 Over $488,500 Over $517,200
- IRA: The 2022 contribution limit for traditional IRAs and Roth IRAs stays steady at $6,000, plus $1,000 as an additional catch-up contribution for individuals aged 50 and up. However, the income ceilings on Roth IRA contributions went up. Deduction phaseouts for traditional IRAs also start at higher levels in 2022
If your filing status is... And your modified AGI is... Then you can contribute...
married filing jointly or qualifying widow(er) < $204,000 up to the limit
married filing jointly or qualifying widow(er) > $204,000 but < $214,000 a reduced amount
married filing jointly or qualifying widow(er) > $214,000 zero
- Student Loans: Courts have blocked the Biden administration’s student debt relief program. The student loan payment pause is extended until the U.S. Department of Education is permitted to implement the debt relief program or the litigation is resolved. Payments will restart 60 days later. If the debt relief program has not been implemented and the litigation has not been resolved by June 30, 2023 – payments will resume 60 days after that. But even if your student loan debt isn't canceled (or only some of it is forgiven), you may be able to deduct up to $2,500 of student loan interest paid each year. However, the credit amount is gradually reduced to zero if your modified AGI exceeds a certain amount.
- Teachers: For the 2022 tax year, teachers and other educators can deduct up to $300 of these out-of-pocket expenses ($250 for 2021). The maximum deduction for 2022 jumps to $600 for a married couple filing a joint return if both spouses are eligible educators – but not more than $300 each.
- Residential Clean Energy Credit: The Inflation Reduction Act, signed into law on August 16, 2022, was renamed the former Residential Energy Efficient Property Credit, now called the Residential Clean Energy Credit. The credit amount was increased starting with the 2022 tax year. After the Inflation Reduction Act, the credit is worth 30% (up from 26%) of the cost to install qualifying electric, water heating, or temperature control systems for your home that use solar, wind, geothermal, biomass, or fuel cell power.
- Clean Vehicle Credit: The Inflation Reduction Act also revised the electric vehicle tax credit (including a name change to the Clean Vehicle Credit). Most of the EV tax credit amendments don't apply until 2023. However, there could be some impact on your 2022 tax return if you buy an electric vehicle this year.
- Payroll Taxes: The Social Security annual wage base is $147,000 for 2022 (a $4,200 hike from 2021). The nanny tax threshold went up to $2,400 for 2022, a $100 increase from 2021
- Standard Mileage Rates: If you run a small business, the standard mileage rate is increased substantially. From January 1 to June 30, the 2022 standard mileage rate for business driving is 58.5¢ per mile (56¢ per mile in 2021). From July 1 to December 31, the 2022 mileage rate for the use of an automobile for business purposes rises to 62.5¢ per mile
- In 2022, mortgage insurance premiums cannot be deducted
- Form 1099K reporting requirements
- Form 1099-K has been around for a while, but it’s received more attention recently because of a recent rule change. This form was created in 2012 to ensure that individuals and businesses report all their income for tax purposes. If you received payment from online platforms, apps like PayPal, eBay, Facebook Marketplace, etc., or payment card processors, the platform or app you used would send two copies of your 1099-K information. One is for you so that you can prepare your taxes. The other will go to the IRS as a record of your transactions. In early 2021, a law that dropped the 1099-K requirements for 2022 from $20,000 (and 200 transactions) to $600 from any platform was passed. This law is meant to apply to payments for goods and services but could have included personal payments from apps such as Venmo, Paypal, Etsy, and Ticketmaster, to name a few. On Dec. 23, the IRS announced that the new $600 rule would be delayed and that the previous rules would apply to 2022 returns.
- Some other tax benefits for businesses that are no longer available in 2022 are
- Research and expenditures must be amortized under section 174 rather than expensed, beginning in 2022.
- Depreciation, amortization, and depletion are not added back to the calculation of adjusted taxable income beginning in 2022 for the section 163(j) limit for business interest.
- 100% bonus depreciation begins to phase out in 2023.
Millions of Americans lost their jobs due to the Covid-19 pandemic and received unemployment compensation. Many of them have received such compensation for the first time and are not aware that they owe federal and NC state taxes on such compensation. The unemployment compensation was funded by both State and Federal dollars and was administrated by the State employment agencies. Apart from the regular State UI, the compensation included a federally funder flat $600 / week compensation( The amount was reduced to $300/week after the program was extended in August 2020) The state employment agency that issued the payment will issue form 1099-G that will report the total amount of benefits paid to a claimant in the year 2020. This amount includes both federal and state UI compensation. The taxpayers should include this amount in their 2020 Income tax return. NC taxpayers can download form 1099-G through their online account at des.nc.gov where they applied for the unemployment benefits. Some lawmakers are urging the sponsor of the New COVID-19 Aid Package bill to include the federal tax relief for up to $10,200 of unemployment payments. Till that bill becomes the law, plan for paying tax on 100% of the employment benefits.
The Consolidated Appropriations Act, 2021 was passed by both chambers of Congress on Dec 21 st , 2020. The bill also includes economic stimulus provisions for the coronavirus pandemic. After much deliberation, the President signed the bill into a law on the night of Dec 27th, 2020. Below is a summary of some of the key provisions/ tax policy changes that will impact individuals and families. Earlier this week, I had written another blog that summarizes the impact of this bill on small businesses. Stimulus 2.0 passed – Key provisions impacting Businesses Another round of Stimulus Payments Direct payments of $600/adult as compared to $1,200 under the CARES Act. Dependents will get $600 as compared to $500 under the CARES Act. The phaseout starts at the same AGI levels as in the CARES act i.e. Single taxpayers AGI > than $75,000 Married filing jointly having AGI > than $150,000 Head of house having AGI > $ 112,500 The payment decreases by $5 for every $100 the AGI exceeds the threshold. AGI from the 2019 Tax returns will be used for calculations. As with the last stimulus payment, this payment is considered an advance on a 2020 tax credit and the reconciliation will happen on the 2020 tax return. This entails that if some reason an eligible individual did not get the payment, he / she will be able to claim the eligible amount through a Tax credit on their 1040. If an individual received a payment that is more than their eligibility based on 2019 AGI calculations, the law does not specifically ask such individuals to return the difference to the IRS If the law is not signed on time and / or if the IRS delays release of payments, I do not know how these payments can be reconciled on 1040 by 15 th April 2020 deadline. The IRS may extend the reconciliation on 2021 tax return. Other options like filing amendments, extending the deadline for filing 1040 will be too disruptive. Hopefully, we will get further guidance from the IRS once the act is signed into law by the President. Other eligibility criteria for receiving the stimulus payment SSN is a requirement for receiving this payment - I have been asked this question multiple times that if one working spouse has an SSN and the other one has an ITIN, which is typically the case with people on work visa like H1B, are they eligible for this payment? The law and the IRS rules state that generally, if you are a U.S. citizen or U.S. resident alien and if you are married filing jointly both spouses should have an SSN valid for employment to be eligible for this payment. The exception is when either spouse is a member of the U.S. Armed Forces at any time during the taxable year, in which case only one spouse needs to have a valid SSN. Both spouses may not be claimed as a dependent on another taxpayer’s return Unemployment Benefits Federal Pandemic Unemployment Compensation is extended till 14 th March 2021, but the amount is reduced to $300 / week. In the CARES Act, the amount was $600/ week For workers who have both wage and self-employment income but whose usual unemployment calculation doesn’t consider the self-employment income, the amount is $100 / week Pandemic Unemployment Assistance has been extended till March 14th, 2021.This program allowed independent contractors, the self-employed, freelancers and gig workers to qualify for unemployment insurance Deductions for Charitable Contributions Taxpayers who do not elect to itemize can still take a deduction of $600 (MFJ) and $300 for all other filing statuses provided the contribution is made is cash during the taxable year 2020 & 2021 The act also allows a charitable deduction of 100% of AGI for both 2020 and 2021 Earned Income Credit and Child Tax Credit For calculation of the earned income credit and child tax credit the act allows taxpayers to choose to use 2019 income on 2020 returns Extension of Eviction Moratorium The order issued by the Centers for Disease Control and Prevention entitled ‘‘Temporary Halt in Residential Evictions to Prevent the Further Spread of COVID–19’’ is extended through January 31, 2021
On December 21st, both the Senate and the House passed a massive government funding bill that will implement the provisions of the Consolidated Appropriations Act, 2021. It is a $1.4 trillion bill to fund the government until September 2021. The bill also includes economic stimulus provisions for the coronavirus pandemic. On the night of December 21 st , the House of Representatives added a few changes to the Senate’s version of the bill and sent it back to the Senate. The Senate approved the House amendment and the bill was presented to the President. After much deliberation, the President signed the bill into a law on the night of Dec 27th, 2020 It is a 5593-page bill, and it will take weeks to interpret all its provisions. Below is a summary of some of the key provisions/ tax policy changes that will impact the small businesses. Earlier this week, I had written another blog that summarizes the impact of this bill on small businesses Stimulus 2.0 passed – Key provisions impacting Individuals & Families Paycheck Protection Program (PPP) Tax Deductions This bill clarifies that the businesses can take tax deductions for expenses paid with forgiven PPP proceeds. PPP was originally introduced in March 2020 through the CARES Act. This act clearly mentions that forgiven PPP debt is not taxable, but it did not explicitly address the issue of tax deductions. The IRS in its notices and rulings stated that expenses paid with tax-exempt income are not deductible. This was not in accordance with the intent of congress which was to tax nothing related to PPP. The new act finally addressed the issue of deductions and it clearly states that deductions are allowed. The Second Round of PPP Businesses that have already received a PPP loan in 2020 under the CARES Act can apply for a second round of PPP loan as well. To qualify for this loan, the business should have less than 300 employees and they should have utilized the previous PPP loan and they should be able to demonstrate at least 25% reduction in gross revenue in any quarter in 2020 compared to 2019. Businesses that could not apply or were not eligible for first round of PPP can now apply under this new bill. Eligible new borrowers should have less than 500 employees. Food and Accommodation services businesses with NAICS codes starting with 72 and not for profit organizations should have less than 300 employees. These new borrowers should be able to demonstrate at least a 25% decline in revenue in any quarter in 2020 compared to the same quarter in 2019. Sole proprietors, independent contractors, eligible self-employed individuals, not for profit and churches are qualified to apply for the loan. PPP2 uses the same calculation formula as PPP1. The application deadline is March 31 st , 2021. Other important provisions related to PPP The new act repeals the requirement that PPP borrowers deduct the amount of any EIDL advance from their PPP forgiveness amount. With this provision, businesses will be able to retain up to $10,000 that they otherwise would have to return to the SBA, under the CARES Act. Under the new act the congress has asked the SBA to create, within 24 days, a simplified forgiveness application process for loans of $150,000 or less Business Meal Deductions Meal deductions for 2021and 2022 are 100% if the meal is provided by a restaurant. Employee Retention Credit The Employee Retention Credit, introduced under CARES Act, is a refundable tax credit against certain employment taxes. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise been required to make. Under the CARES Act, a business could NOT take the ERC if it has received forgiveness on a PPP loan. This new legislation changes that and businesses can now claim ERC in addition to having a forgiven PPP loan. I will be providing more insights as more developments unfold in the days and weeks to come.
On September 4, Governor Roy Cooper signed into law the Corona virus Relief Act 3.0. This law has a provision to make a onetime payment of $335 to families of qualifying children. This payment is to help cover any virtual schooling and child-care costs. Individuals who reported at least one qualifying child on their 2019 North Carolina income tax return will receive the payment automatically. No other action is required from their side. It has come to NCDOR's attention that some tax preparation software incorrectly reported zero qualifying children on NC tax return for taxpayers who had reported and were were allowed federal child tax credit/s on their 1040. On their NC State tax return form D-400, line 10a (enter the number of qualifying children for whom you were allowed a federal child tax credit) the software reported 0 instead of transferring the number of child tax credits from form 1040. The rules set forth in the law bar the NCDOR from automatically issuing the grant to those affected taxpayers NCDOR is asking such taxpayers to file an amended NC State tax return that shows the correct number on line 10a of form D-400. The deadline to file amended return is 15th October 2020 NCDOR has not listed which tax software vendors have this error so anyone who has atleast one qualifying child and had used tax preparation software for filing 2019 tax return should check line 10a on their D 400 . If it's 0 , check the number of child tax credits on 1040 (Page1 , Dependents) and file an amendment accordingly Some Tax software may allow to amend and file just the state tax return but filing a paper return is not complicated either. Fill out D 400 and D-400-Sch-AM, attach your 1040 and mail that to NCDOR
On July 2, 2020, Governor Roy Cooper signed HB 118 Liability Safe Harbor, expanding the immunity protections created by a previous bill passed in May 20. The previous bill limited immunity protection to healthcare “providers” and “facilities,” “essential businesses” and “emergency response entities” with the protection for businesses and emergency response entities further limited to only claims by employees and customers. The new bill expanded civil immunity to all entities against all infection claims during the ongoing COVID-19 pandemic. The immunity provided by both laws, however, is limited to claims of ordinary negligence and will not shield persons or businesses from claims or acts arising out of gross negligence, willful or wanton conduct, or intentional wrongdoing https://www.ncleg.gov/Sessions/2019/Bills/House/PDF/H118v8.pdf
On March 27, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. While the legislation introduced a broad range of relief measures CARES act, two programs – Paycheck Protection Program and Economic Injury Disaster Loan program, are the lifeline for Small businesses. Paycheck Protection program PURPOSE OF THE LOAN: Pay for payroll, mortgage, rent, utilities, healthcare and other debt financing costs ELIGIBILITY : Businesses including sole proprietorship and independent contractors with less than 500 employee that were in operations as of 1st March 2020, paid salaries and payroll taxes for employees and can provide a certificate in good faith that their business is negatively impacted due to COVID-19. Businesses are not required to prove that they cannot get credit elsewhere LOAN AMOUNT: Lesser of 2.5 months of average monthly cost of payroll, mortgage, rent, utilities, healthcare and other debt financing costs or $10 million. LOAN FORGIVENESS: Amount of loan money that is spent on paying for payroll, mortgage, rent, utilities, healthcare and other debt financing costs incurred is eligible for loan forgiveness. Money spent on other things like buying inventory will not be eligible for forgiveness LIMITS ON AMOUNT OF FORGIVENESS: The principal of the loan amount eligible for forgiveness will be reduced if employees are laid off or their salaries reduced INTEREST RATE: Maximum 4% interest will be charged for the loan amount that is not forgiven LOAN MATURITY: loan amount this is not cancelled will have to be paid back after 10 Years from the date on which the borrower applies for loan forgiveness Economic Injury Disaster Loan program This program is administered under provisions of section 7(b) of Small business act with expanded eligibility criterion and lowered restrictions. This loan will be administered through the states. The businesses with credit available elsewhere are not eligible for this loan. Also, the business must be in the designated area for Economic Injury Disaster Loan assistance. Check SBA.gov/disaster to see if your area is covered.
Here is a summary of some critical provisions for Families, Businesses and for promoting Telehealth that have been announced by congress and various federal & state agencies till date under the CARES act. Families and Individuals Stimulus Checks: Direct payment of $1200/adult + $500 / dependent child. Amount is limited by income. You should see these payments coming in starting 04/13 Federal employment compensation of $600/week. This in addition to state unemployment compensation. NC sill start releasing this payment by mid of week starting 04/13 Extension of 2019 tax filing date to July-20. Note that NC will start accruing interest on unpaid tax as of Apr-20 OTC medication can now be purchased without a prescription with monies from an HSA/HRA/FSA Menstrual care products can now be reimbursed from HSA/HRA/FSA Small businesses Payroll Protection program –Loan of amount 2.5 X of average monthly payroll to primarily fund payroll (75%) and rent, utilities, mortgage & business loan interest. Eligible for forgiveness Economic injury disaster loan: Up-to $2mn loan at 1% for working capital and forgivableloan of up to $10,000. Last date for application is 04/30 Extension of 2019 tax filing date to July-20. Note that NC will start accruing interest on unpaid tax as of Apr-20. You don’t need to file any form for extension Eligible employers can receive credit of 50% of qualified wages against 6.2% payroll tax. Excess credit is refundable i.e. IRS will refund cash. You can take either this or PPP but not both Defer payroll taxes Net operating losses for 2018, 2019 and 2020 can be carried back five years with no taxable income limitation. Based on your situation this could lead to cash refund from IRS Health care offices Forgivable loans for telehealth programs for eligible health care providers Telehealth conferences are now fully covered by policies without deductibles (including high deductible plans) Relaxed rules for providing remote health care services
The Department of the Treasury and the Internal Revenue Service issued Notices this month that any for person with a Federal income tax payment due date of April 15, 2020 , the due date for filing Federal income tax returns and making Federal income tax payments (including payments of tax on self-employment income) is automatically postponed to July 15. The term “person” includes an individual, a trust, estate, partnership, association, company or corporation. here is no limitation on the amount of the payment that may be postponed. The initial Notice 2020-17 had a cap- individuals can defer up to $1 million of tax liability and corporations can defer up to $10 million. The cap on the amount was removed in subsequent Notice 2020-18. So, what does this mean in practical terms for a taxpayer? If you have not yet filed your Federal return and paid your taxes you have time till 31-July-2020 to do the same. You do not need to file any form for this extension but if you need extension beyond 31-July-2020 you need to file forms 4868 or 7004. The period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file Federal tax return. Any penalties that taxpayer owe to IRS as of 15-April-2020 will still be applicable when they file the return in July 2020. For example, if you did not pay sufficient estimated tax in 2019, the penalty for failure to pay estimated tax will still be applicable when you file federal tax return in July 2020. Should you wait till July 2020 to file your tax returns? Following considerations can help you make an informed decision IRS will continue to process refunds so taxpayers who are owed refunds should file as soon as possible and file States may or may not follow all the guidance from the IRS and you will have read your state rules very carefully. For example, North Carolina Department of Revenue recently announced that they will extend the April 15 tax filing deadline to July 15 for individual, corporate, and franchise taxes. Taxpayers will not be charged penalties if they file and pay their tax before the updated July 15 deadline. BUT the department cannot offer relief from interest charged to filings after April 15. Unless state law is changed, tax payments received after April 15 will be charged accruing interest over the period from April 15 until the date of payment. There was no indication in the IRS notices issued untill today about extending the due date for filing forms 1120S and 1065 for Partnerships, S Corps and LLC’s. The due date for filing these forms is still 16-March-2020
I received multiple queries about eligibility for the $1,200 federal stimulus money from people who are dependents or who are on work visa like H1B. Hopefully below explanation will provide answers to some of those questions. You are eligible if you 1) Are a US citizen or resident alien 2) Have a Social Security number that is valid for employment. If you are married and filing jointly BOTH spouses need to have SSN with one exception for member of U.S Armed forces 3) Cannot be claimed as a dependent by another taxpayer 4) Have adjusted gross income within certain limits. See my earlier posts on the income limits Dependents ---------------- Keep in mind that, from tax perspective, you are a dependent if somebody can claim you to be their dependent even if they have not actually claim that on their tax return. Whether you can be claimed as a dependent by somebody else is determined by rules based on age, relationship, your income, residency status and if you are pay for more than 50% of your living expenses. So if you are a US Citizen of more than 16 years of age , living with your family , earning less than $12,200 and if family is providing for more than 50% of your living expenses or you are in 4 year college and your family is proving more than 50% of you expenses you are a dependent on your family member and you are not eligible for the $1,200 stimulus money Work Visa holders like H1B -------------------------------------- Residency requirement: People with work visas are resident aliens if they fulfill substantial presence test. If you have been physically present in the US for at least 183 days in the year 2019 you meet the requirements SSN requirement: If you are filing jointly with your spouse BOTH spouses should have SSN that is valid for employment. Exception is granted only if either spouse is a member of U.S armed forces, then only one spouse needs to have SSN
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