3. How do tax brackets work?
Here’s a quick review:
The tax bracket that the highest dollar of your income falls into is called your marginal tax rate. But because of the U.S. tax system, your tax liability isn’t simply your marginal rate multiplied by your taxable income. The rate you pay is your effective tax rate. Here’s a real-life example that shows how it works:
Let’s say Kelly is a single filer with $50,000 in taxable income.
- From $0 to $10,275, Kelly is taxed at 10%.
- From $10,276 to $41,775, she is taxed at 12%.
- From $41,776 to $50,000, Kelly is taxed at 22%.
Kelly’s marginal tax rate is 22%. But once she runs the calculations, Kelly will pay around 12% of her income. This is her effective tax rate, equal to about $6,000.
4. What is the standard deduction for 2022?
For 2022, the standard deduction has increased slightly to adjust for inflation.
*Note that if you are age 65 or older or blind, your standard deduction is higher. If you fall into one of these categories, your standard deduction is increased by $1,750 if you’re single or $1,400 if you’re married.
5. Should I itemize or take the standard deduction?
The option you choose depends on the one that will maximize your tax benefits. Taxpayers usually claim the option that lowers their tax bill the most. You get to decide which is better for you each year.
The standard deduction allows you to deduct the set amount from your taxes, no questions asked. If you plan to itemize, you’ll need documentation to verify your qualifying expenses from a list approved by the IRS.
6. What is a tax credit, and which ones should I take?
A tax credit is the amount of money you’re permitted to subtract, dollar for dollar, from any income taxes you owe. Here are seven of the most common ones:
- Child Tax Credit: For 2022, the child tax credit is non-refundable. The tax break reverts to the previous amount — up to $2,000 per child under age 17. Note that this credit starts phasing out for higher-income taxpayers.
- Earned Income Tax Credit (EITC): The EITC helps low- to moderate-income workers and families get a tax break. If you were married filing jointly and earned less than $59,187 in 2022, you may qualify for the credit or even a refund check. Find out if you qualify by looking at the 2022 EITC tables.
- Child and Dependent Care Credit: For 2022, the child and dependent care credit is non-refundable, and the maximum credit percentage is 35%. The credit allows up to $3,000 in expenses for one child or disabled person and $6,000 for more than one. The full child and dependent care credit will only be allowed for families making less than $15,000 a year in 2022 (down from $125,000 in 2021).
- Adoption Tax Credit: Families that grew through adoption might qualify for the Federal Adoption Tax Credit. Adoptive parents must earn $223,410 or less to be eligible for the full credit, which provides up to $14,890 per eligible child — defined as any person under the age of 18 that is mentally or physically unable to take care of themselves.
- American Opportunity Credit: The American Opportunity Credit allows parents to claim up to $2,500 per student for tuition, activity fees, books, supplies, and equipment during the first four years of college. Students must be enrolled at least half-time.
- Lifetime Learning Credit: The 2022 Lifetime Learning Credit is worth as much as $2,000 to help offset higher education expenses. Taxpayers can use the credit for tuition and related expenses paid for undergraduate, graduate, and professional degree courses for themselves, their spouses, or dependents.
- Saver’s Credit: This tax credit is worth up to $1,000 ($2,000 if married and filing jointly) for mid-and low-income taxpayers who contribute to a retirement account.
7. Are there any deductions for student loan interest?
Yes. You may be able to deduct up to $2,500 of student loan interest paid in 2022. Keep in mind the credit amount is gradually reduced if your modified AGI reaches a certain threshold.
8. What are the standard mileage rates for 2022?
The 2022 standard mileage rate for business driving from January 1 to June 30 is 58.5¢. Effective July 1 through December 31, 2022, the IRS raised the mileage rate to 62.5¢.
9. What are the medical travel and military mileage rates for 2022?
The mileage rate for medical travel and military moves is 18¢ for the first six months of 2022 and 22¢ for July through December.
Retirement Tax Questions
10. What are the retirement plan contribution limits for 2022?
2022 Retirement Plan Contribution Limits and Catch-Up Contributions:
- 401(k), 403(b), and 457 plans: Contributions for these plans are capped at $20,500 for 2022. Taxpayers 50 and older can once again put in $6,500 more as a “catch-up” contribution.
- Simple IRAs: The 2022 cap on contributions to SIMPLE IRAs is $14,000, plus an extra $3,000 for people age 50 and up.
- Traditional and Roth IRAs: Limits for IRAS are $6,000, plus $1,000 as an additional catch-up contribution for those aged 50 and up.
11. What about required minimum distributions (RMDs) for 2022?
The IRS updated the table used to calculate required minimum distributions (RMDs) to account for longer life expectancies beginning in 2022. See the updated table here.
12. Are there any tax breaks for senior adults and retirees?
Yes! Here are a few to look for:
Larger standard deduction: The standard deduction for seniors is $1,750 higher for those younger than 65 who file single or head of household. Married filing separately or jointly taxpayers receive a $1,400 boost in the standard deduction.
Property tax breaks: Property tax rules differ by state and local jurisdiction. In some areas, people above a certain age who earn below a particular income level qualify for property or school tax exemptions. Be sure to look at specific rules in your area.
Credit for the elderly and disabled: To qualify for this credit, you must have an AGI below $17,500 ($25,000 if both spouses are 65 and older) and Social Security and pension income under $5,000 ($7,500 for couples).
Additional IRA contribution: Employees 50 and older can save an additional $1,000 in an IRA for a total of $7,000 in 2022.
401(k) catch-up contributions: Older workers with a 401(k) plan can make catch-up contributions. If you were 50 or older in 2022, the catch-up limit is $6,500 for workplace plans.
No early withdrawal penalty: Once you turn age 59½, you can withdraw money from your IRA for any reason without the 10% penalty. Finally!
Qualified charitable distributions: Retirees aged 70½ and older who give up to $100,000 directly from their IRA to a qualified charity won’t owe income tax on the gift.
HSA contribution limit: Individuals aged 55 or older by the end of the 2022 tax year can contribute up to $4,650 to a health savings account (up $50 from 2021).
Long-term care insurance premium limits remain the same: Taxpayers 71 or older can write off up to $5,640 per person.
Miscellaneous Tax Questions
13. What are the lifetime estate and gift tax exemptions for 2022?
The lifetime estate exemption for 2022 jumped from $11.7 million to $12.06 million ($24.12 million for couples).
The gift tax exclusion rose to $16,000 per recipient. This means you can give up to $16,000 to each child, grandchild, or any other person in 2022. So long as you stay below the limit, neither you nor your recipient will be required to file a gift tax return or tap the lifetime estate and gift tax exemption.
14. What are the capital gain rates for 2022?
Remember, if you sold stocks, mutual funds, or other capital assets that you held for at least one year, any gain is taxed at a 0%, 15%, or 20% rate.
The 0% rate applies to those with taxable income:
- Up to $41,675 for individual taxpayers
- Up to $55,800 for head of household filers
- Up to $83,350 for married filing jointly returns
- Up to $41,675 for married filing separately returns
The 15% rate applies to those with taxable income:
- $41,676 to $459,750 for individual taxpayers
- $55,801 to $488,500 for head of household filers
- $83,351 to $517,200 for married filing jointly returns
- $41,676 to $258,600 for married filing separately returns
The 20% rate applies to those with taxable income:
- Over $459,751 for individual taxpayers or married filing separately
- Over $488,501 for head of household filers
- Over $517,201 for married filing jointly returns
- Over $258,601 for married filing separately returns
You can get a general idea of your after-tax investment gains with a capital gains calculator.
15. What is the Residential Clean Energy Credit?
The Inflation Reduction Act, signed into law on August 16, 2022, renamed the former Residential Energy Efficient Property Credit to the Residential Clean Energy Credit. For 2022, the credit amount was increased to 30% from 26% in 2021. The credit can offset the cost of installing electric, water heating, or temperature control systems in homes that use solar, wind, geothermal, biomass, or fuel cell power.
16. Are HSA contributions tax-deductible? What else has changed with HSAs?
Yes! The contributions to an HSA are tax-deductible, and the earnings (if invested) are tax-free, as are withdrawals for eligible medical expenses. You report your contributions on Form 8889 with the total contributions transferred to and reported on your Form 1040.
HSA funds, flexible spending arrangements (FSAs), and health reimbursement arrangements (HRAs) can purchase over-the-counter medicines without a doctor’s prescription.
17. Are charitable contributions eligible for a tax deduction in 2022?
Any contribution—of cash or non-cash assets—received by December 31, 2022, is eligible for a tax deduction. Generally, you may deduct up to 50% of your AGI. Keep in mind that charitable contributions are only deductible if you are itemizing.
18. Are there any tax deductions for teachers in 2022?
Yes! Teachers and other educators who pay out of pocket for books, supplies, and other materials used in the classroom can deduct up to $300 for these expenses.
19. What’s changing this year with platforms like Paypal and Venmo?
It turns out, nothing. The IRS previously announced that payment platforms like Venmo and Paypal would be required to send Form 1099-K to anyone who earned $600 or more on the platform in 2022. On December 23, the IRS reversed course for the 2022 tax year, reverting to the previous requirement that platforms provide 1099-Ks to those who earned at least $20,000 from 200-plus transactions on the platform.
This is not a cancellation of the new requirement, but a delay for the 2022 tax year. Reach out if you have any questions at all about this.
20. Are state tax payments taxable?
During 2022, 21 states paid stimulus payments to their residences. The IRS has declared that the payments were not taxable for residences of the following states:
- New Jersey
- New Mexico
- New York
- Rhode Island
For residents of the other four states that sent out payments (Georgia, Massachusetts, South Carolina, and Virginia), they’ll need to consult a tax advisor to determine whether the state payment was taxable.
Just-for-Fun Tax Deductions
21. Can clarinet lessons for my child reduce my taxes? What about summer camps?
Why, yes, they can! It’s true. Clarinet lessons for your son or daughter can qualify as a medical expense because they may help correct a misaligned bite. Lessons might also qualify as dependent care expenses if they happen outside the normal school day.
Summer camps can help you too! If you are single and working or married and both you and your spouse work, the costs of day camp during the summer generally count as expenses toward the child and dependent care credit.
22. Can I deduct the cost of my backyard swimming pool?
If you have a medical condition like arthritis that doctors believe could be helped by regular time in the water, you may be able to write off the cost of putting in a pool.