ANNUAL TAX UPDATE
Child tax credit (CTC)
Generally, the CTC is $2,000 per qualifying child under age 17 and $500 for any other dependent (ODC). For 2021, the CTC was increased to a maximum of $3,600 for each qualifying child under age six and $3,000 for each qualifying child age 6 to 17. The $500 for any other dependent was not increased in 2021. Also for the year 2021, certain taxpayers could receive an advance of the credit in monthly installments between July 1, 2021, and Dec. 31, 2021.
In 2022, eligible taxpayers will qualify for the full $2,000 CTC and $500 ODC if their modified adjusted gross income (MAGI) is $200,000 and below for single filers or $400,000 and below for joint filers. The credit is reduced by $50 for every $1,000 over these thresholds. In 2022, the advance payment of the CTC is no longer available, and taxpayers will receive their credit when they file their 2022 tax return.
Child and dependent care credit
Taxpayers who pay an individual to care for a qualifying person so they can work or look for work are eligible to claim a credit for such work-related expenses. A taxpayer must have earned income to qualify for the credit. In the case of a married couple, both taxpayers must have earned income. Special rules exist for determining earned income for each month a spouse is a full-time student or incapable of caring for themself. The earned income of an incapacitated spouse is deemed to be $250 per month if there is one qualifying dependent or $500 if there are two or more qualifying dependents [§21(d)(2)].
The dependent care credit for §21 child and dependent care expenses for 2022 is a nonrefundable personal credit and may not exceed the taxpayer’s income tax liability. A taxpayer cannot receive a refund if the amount of a nonrefundable personal credit exceeds their tax liability. For 2022, the dollar limit for eligible expenses is $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. For taxpayers with AGI of $15,000 or less, the credit is equal to 35% of employment-related expenses [§21(a)]. The maximum credit is $1,050 ($3,000 x .35) for one qualifying child or $2,100 ($6,000 x .35) for two or more qualifying children [§21(c)]. The credit is reduced by one percentage for each $2,000 of AGI or a fraction thereof above $15,000 through $43,000. Taxpayers with AGI over $43,000 are allowed a credit equal to 20% of employment related expenses [§21(a)(2)].
For 2021 only, the child and dependent care credit was fully refundable and the dollar limit for eligible expenses increased from $3,000 to $8,000 for one eligible child and from $6,000 to $16,000 for two or more eligible children. This expansion was made available under the American Rescue Plan Act (ARP) due to the dependent care challenges related to the pandemic. The maximum credit rate also increased from 35% to 50%, and the AGI level at which this percentage was reduced increased substantially from $15,000 to $125,000.
Earned income tax credit
In general, the earned income tax credit (EIC) is available to low-income individuals who work. This credit is a percentage of the individual’s earned income based upon the number of qualifying children the individual has, if any. The EIC is a refundable credit. Individuals can receive a refund even if they had little or no tax liability or had no federal income taxes withheld from their paycheck. Since the credit is refundable, eligible taxpayers will need to file a return to get a refund even if they aren’t required to file a tax return. The individual’s earned income, AGI, filing status and number of qualifying children determines the maximum credit available (Rev. Proc. 2021-45). Married individuals generally must file a joint return to claim the EIC. Married individuals living apart from their spouse for the last six months of the tax year may qualify for head of household (HOH) filing status.
Taxpayers who have excessive investment income that exceeds an inflation-adjusted amount cannot claim the EIC. For 2022, the limit for excessive investment income is $10,300, up from $10,000 in 2021. Regarding the EIC, two tax provisions expired at the end of 2021: the increased credit amount for taxpayers without children (childless EIC) and the expanded age range for the childless EIC.
Generally, the childless EIC is available only if the taxpayer (or spouse on a joint return) is between ages 25 and 64 at the close of the year. For tax years beginning in 2021, there was no maximum age and the minimum age dropped to 19, 18 and 24, as explained below. The amount of the EIC for taxpayers with no children drastically decreased in 2022 because the ARP provisions that temporarily increased it in 2021 to $1,502 (up from $538 in 2020) did not carry over to 2022.
For 2022, the maximum amount of the childless EIC is $560. For 2022, the minimum and maximum age to claim the credit follows the 2020 rules. The childless EIC is available to the taxpayer (or spouse if filing a joint return) who is age 25 to 64 at the close of the tax year. For 2021, there was no maximum age, and the minimum age dropped to 19 for most taxpayers. The minimum age was 24 for a specified student (student for at least five months of the year) and 18 for a qualified former foster youth (in foster care at any time after turning 14) or a qualified homeless youth (homeless in any taxable year).
Non-itemizer charitable deduction
For 2022, non-itemizers do not receive a deduction for charitable contributions. The deduction of up to $300 (MFJ filers allowed $600) for non-itemizing individuals making charitable contributions expired at the end of 2021. 100% of AGI charitable deduction for cash donations The 100% of AGI charity deduction for cash contributions is back to a 60% limit for 2022.