The American Rescue Plan Act (ARPA) was designed to provide economic relief to families and individuals and help the economy recover from the impacts of the COVID-19 pandemic. Over the past two years, we’ve seen the tax industry respond to the many fast-changing tax laws. Tax year 2022 will begin a reset of provisions that were expanded and extended through the ARPA. Although there is no single definition of the “new normal,” we can expect to see a shift back to familiar tax provisions.
New tax law updates & changes at a glance:
- Recovery Rebate Credit – The credit has expired and cannot be claimed on the 2022 tax return.
- Earned Income Credit – The credit will return to 2020 guidelines and limitations.
- Child Tax Credit – The enhanced provisions have expired and returned to 2020 limitations.
- Child and Dependent Care Credit – The enhanced provisions have expired and returned to 2020 guidelines.
- COVID Retirement Plan Distribution – Third and final distributions installments will be reported on 2022 returns.
- Premium Tax Credits – The credit provisions were expanded and extended through 2025.
- Energy Efficiency Credits – The tax credits have been extended and expanded, going into effect in 2023.
- Tax Extenders –All provisions extended through 2021 will expire on December 31, 2022.
Recovery Rebate Credit
The Recovery Rebate Credit was created for taxpayers who were missing a portion or entire stimulus payment. The first, second, and third rounds of Economic Impact Payments issued in 2020 and 2021 would have been claimed on either the 2020 or 2021 tax returns. However, this credit has expired as no recovery rebate credits were issued in 2022 and cannot be claimed on the 2022 tax return. Keep in mind if your client has not yet filed their 2020 or 2021 tax return, they will still be able to claim this credit on a prior year’s return.
If your client is missing a portion of their first or second round of stimulus payments, this credit should be claimed on the 2020 return; if they are missing a portion of the third round of stimulus payments, this credit should be claimed on their 2021 return. You should verify the amount of any stimulus payments your client received using their IRS online account or Letter 6475. The IRS mailed Letter 6475 directly to taxpayers. Confirming the correct amount of stimulus payments your client received will allow the credit to be calculated correctly and avoid delays in processing their return.
Earned Income Tax Credit (EITC)
While the Earned Income Tax Credit will not go away, the extended provisions provided through the ARPA will expire. This means the return of pre-2021 guidelines for clients who are looking to claim EITC on their 2022 tax returns. For example, taxpayers can no longer use prior year earned income to claim EITC – only income earned in 2022 will be used to claim the credit. Your clients will also see the return of age limitations on this credit. To claim EITC without a qualifying child, your client must be 25 years old and under the age of 65. These are the same as the 2020 requirements for EITC.
However, the increase in investment income allowed on your return will remain a permanent EITC provision. Taxpayers can receive up to $10,300 in investment income and qualify for the EITC. This amount will increase year over year to account for inflation.
Consider preparing your clients who received this credit in 2021 to expect a decrease in the benefit amount in 2022. Depending on the number of qualifying children, the maximum benefit will be between $560 – $6,935. You can compare prior year EITC income thresholds and credit amounts on the IRS website. This year the income thresholds and maximum earned credit amounts for the tax year 2022 are as follows:
|Number of Qualifying Children||Maximum Adjusted Gross Income (Single, Head of Household or Widowed)||Maximum Adjusted Gross Income (Married Filing Jointly)||Maximum Earned Credit|
Child Tax Credit
The Child Tax Credit (CTC) is a significant tax credit among taxpayers with dependents as it helps to offset the cost of raising children. In 2021, the ARPA introduced the enhanced CTC, which provided additional tax provisions through the credit. This two-year enhancement will expire on December 31, 2022. The CTC is reverting to its original limitation of $2,000 for each qualifying dependent under 16 years old.
Another returning provision, the credit is no longer fully refundable. The maximum refundable portion of this credit is $1500/child. However, the refundable part of the credit will increase by $100/year to account for inflation – raising it to $1600 on 2023 returns. In addition, the refundable portion of the credit is limited to 15 % of the taxpayer’s total earned income of more than $2500. Schedule 8812 can be used to calculate the amount of the credit and refundable portion. These calculations will be familiar to those taxpayers eligible for the Child Tax Credit in years prior to 2020.
Clients who phased out of the credit last year will notice the First Credit Phase Out will expire at the end of 2021. For 2022 tax returns, all single taxpayers with an AGI of up to $200,000 may qualify for the full credit. Taxpayers filing married filing joint can claim this credit with an AGI of up to $400,000. For taxpayers with AGI above the threshold amounts, the credit is reduced by an amount equal to 5% for each $1,000 of income that exceeds the limits.
Child & Dependent Care Credit
The tax provisions for the extended Child & Dependent Care Credit will also expire at the end of 2022. While this extension substantially benefited taxpayers last year, it will return to its original 2020 provisions. As a result, the following limits will apply to 2022 tax returns:
- Child and Dependent Care Credit is nonrefundable
- $3,000 expense limit for one qualifying child
- $6,000 expense limit for more than one qualifying child
The credit will max out at 35% of the eligible expenses for taxpayers with an AGI up to $15,000. Taxpayers with an AGI above $15,000 will see a 1% reduction in this benefit per $2,000 of income that exceeds $15,000. There is no AGI maximum for the credit. However, any AGI above $43,000 will receive 20% of their eligible expenses. There for the maximum benefit for this credit is:
- $1,050 for one qualifying individual ($3,000 x 35%)
- $2,100 for more than one qualifying individual ($6,000 x 35%)
COVID Retirement Plan Distribution
During the height of the pandemic, taxpayers could take an early retirement distribution of up to $100,000 without penalty. This distribution was considered a Coronavirus-Related Distribution and would be recognized over (3) years of tax returns. Therefore, the first installment would have been recognized on their 2020 tax return, the second on their 2021 tax return, and the third and final installment on their 2022 tax return.
It is essential to distinguish that all distributions taken any time after December 31, 2020, are not considered Coronavirus-Related Distributions. Although, if the taxpayer took the distribution in connection with a FEMA-designated disaster area, it might have been eligible for deferral treatment in 2021.
For 2022 tax returns, Form 8915-F should be used to report the third and final installment of income for Coronavirus-Related Distributions taken before December 31, 2020. You can review an updated list of Qualified 2020 Disaster Areas on the IRS website.
Premium Tax Credits
If your clients purchased health insurance through the Federal Marketplace or State Exchange, they’ll be glad to hear the Premium Tax Credit (PTC) provisions were extended until 2025. Taxpayers can use this tax credit to lower their monthly health insurance payments, otherwise known as premiums. This credit was initially scheduled to expire in 2021. However, the Inflation Reduction Act has extended the subsidies for three more years (until 2025), increased the size of the credit, and made more people eligible. The credit can be calculated and claimed using IRS Form 8962. The amount of the credit will vary depending on how far above or below the Federal Poverty Line your clients’ income falls and the cost of the benchmark insurance plan. Note that taxpayers who received unemployment will no longer be eligible for the Premium Tax Credit. The IRS Letter 6534 will be sent to taxpayers on behalf of the Center for Medicare & Medicaid Services to provide information on obtaining Marketplace Healthcare coverage. The IRS answers the most frequently asked questions on PTC for tax year 2022.
Energy-Efficient Tax Credits
Energy efficiency tax credits have been extended and expanded through this tax bill. The changes to energy tax provisions will benefit taxpayers who have invested in electric vehicles and energy-efficient improvements to their nonbusiness property. Although some of these changes will not go into effect until the tax year 2023 – it is worth reviewing the impact it may have on your clients’ future filing.
Other extended provisions expiring in tax year 2022
Several provisions were scheduled to expire in 2020. However, Congress elected to extend these tax provisions through 2021. Unless there is new legislation allowing an extension, the following will expire on December 31, 2022, and cannot be claimed on any 2022 tax returns:
- Private Mortgage Insurance Deduction
- Health Coverage Tax Credit (Form 8885)
- Sick Leave and Family Leave for the Self-Employed (Form 7202)
- Tuition and Fees Deduction
- Charitable Contributions for nonitemizers (taxpayers who itemize their deductions can still claim this deduction)
- Business Tax Extenders (most reported on Form 3800) including:
- Accelerated Depreciation for Property on Indian Reservations
- American Samoa Economic Development Credit
- Indian Employment Tax Credit
- Mine Rescue Team Training Credit
- Three-Year Depreciation for Racehorses
This article was last updated on 11/23/2022.