The WSJ Tax Guide 2022

With the latest on claiming expanded child credits, stimulus payments and more

By Laura Saunders and Richard Rubin

THE WSJ TAX GUIDE 2021 1

©2022 Dow Jones & Co., Inc. All rights reserved.
Acknowledgments

The authors of this book are Laura Saunders and Richard Rubin. Graphics are
by Thaddeus Chambers, Merrill Sherman and Josh Ulick. The design editor is
Jay Morris. The publishing editor is Aaron Lucchetti and the lead editor is
David Reilly.

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Table of Contents
Introduction Retirement-Savings Accounts,
Such as IRAs and 401(k)s............................... 34
The Big Picture
Flexible Spending Accounts and
Income-Tax Rates and Brackets.................... 6
the Dependent-Care Credit........................... 37
Investment-Tax Rates and Brackets........... 7
Home-Sellers’ Exemption..............................40
Withholding and Estimated
Other Deductions, Such as
Taxes (Including for
for Home Offices ..................................................41
Unemployment Benefits)................................ 10
Tax Breaks for Education ............................... 43
Stimulus Payments..............................................11
529 Education-Savings Accounts............. 45
State Taxes on Remote Work....................... 13
Beyond the Basics
Cryptocurrency...................................................... 15
Retiree Tax Issues .............................................. 49
Estate and Gift Tax.............................................. 17
For Widows and Widowers ...........................51
Tax Deductions, Credits
and Exemptions The “Kiddie Tax”...................................................54
Standard Deduction and Personal Alternative Minimum Tax.............................. 55
Exemption.................................................................21
Alimony ..................................................................... 56
Child Tax Credit..................................................... 23
For First-Time Taxpayers ................................. 58
State and Local Tax Deductions................. 26
For Business Owners ...........................................64
Mortgage-Interest Deduction..................... 28
EPILOGUE: President Biden
Charitable-Donation Deduction.................30 and the Democrats’ Tax Agenda…
Where It Stands ...................................................... 69
Medical-Expenses Deduction...................... 33

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Introduction

This is the fifth edition of The Wall Street Journal’s Tax Guide. What began with an
editor’s request to summarize the 2017 tax overhaul’s changes for Journal readers
has become—thanks to your enthusiastic response—an annual overview of individual
income-tax provisions affecting Americans.

There has been no lack of material since we started. Congress has enacted new laws:
In 2017 legislators made basic, far-reaching changes set to expire after 2025, while the
2019 Secure Act revised retirement-plan rules. In 2020 and 2021 came a torrent of changes
responding to the Covid-19 pandemic. Meanwhile, the Internal Revenue Service has issued
guidance on hot-button issues ranging from cryptocurrency to required IRA withdrawals.
On top of that, there are inflation adjustments that shift the code slightly every year.

This year’s filing season brings special challenges. Tens of millions of taxpayers will
grapple with reporting requirements for last year’s stimulus payments and expanded
child tax credits. In a historic move, Congress had the IRS prepay a portion of the expanded
credits in monthly installments during 2021. While this change put needed cash in the
pockets of many families, it will shrink refunds many filers are anticipating as well.

As always, taxpayers will have a flood of questions: Do I file for a 2021 stimulus
payment through my return, and is it taxable? How did the child- and dependent-care
credit change last year? What’s the threshold for the zero tax rate on capital gains?
What’s the deadline for contributing to a Roth IRA?

The WSJ Tax Guide aims to answer these questions and many more. We hope it will help
readers in the various areas of their lives touched by taxes. These include saving for college,
buying or selling a home, using retirement plans and pandemic disruptions. With this new
edition, Wall Street Journal readers have a guide to the 2022 world of taxes.

—Laura Saunders and Richard Rubin

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 Section 1
The Big Picture

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Income-Tax Rates and Brackets
Proposals in Congress to raise top income-tax rates have failed to gain traction,
leaving brackets for individuals unchanged

The tax code currently has seven income-tax brackets for

individuals that range from 10% to 37%. The 10% rate takes effect
THE TOP RATES
at the first dollar of taxable income, after benefits such as the
The top tax rate is 37%.
standard deduction are applied. Each tax rate applies to income in For 2026, the top rate is
that bracket. So a taxpayer whose last dollars are taxed at 24% will set to return to 39.6%.
likely have portions of income taxed at 0, 10%, 12% and 22%.

The current rates and brackets were set by the 2017 tax
overhaul, and they expire at the end of 2025. If Congress doesn’t
make changes, the top rate will return to 39.6% in 2026.

The income-tax rates and brackets are adjusted annually for inflation, although
in 2017 Congress switched to an often-slower method for calculating inflation. At
the time, the change was projected to cost Americans $133.5 billion over a decade,
Key Inflation-Adjusted Tax Numbers for 2021
according to Congress’s Joint Committee on Taxation.Individual income tax Taxable income
RATE SINGLE MARRIED, FILING JOINTLY
Not all tax provisions are inflation-adjusted, however. Among
10% the exceptions
Up to $9,950 Up to $19,900
12% $9,951 to $40,525 $19,901 to $81,050
are some tax breaks for homeowners, thresholds for taxes on22%
Social Security
$40,526 to $86,375 $81,051 to $172,750

payments, and certain taxes on investment income. As a result, millions of 24% $86,376 to $164,925 $172,751 to $329,850
32% $164,926 to $209,425 $329,851 to $418,850
Americans owe Uncle Sam more than they would if these provisions
35% were indexed.
$209,426 to $523,600 $418,851 to $628,300
37% $523,601 + $628,301 +
More information about inflation and tax thresholds isSource:
here.Internal Revenue Service

Key Inflation-Adjusted Tax Numbers for 2021 Key Inflation-Adjusted Tax Numbers for 2022
Individual income tax Taxable income Individual income tax Taxable income
RATE SINGLE MARRIED, FILING JOINTLY RATE SINGLE MARRIED, FILING JOINTLY
10% Up to $9,950 Up to $19,900 10% Up to $10,275 Up to $20,550
12% $9,951 to $40,525 $19,901 to $81,050 12% $10,276 to $41,775 $20,551 to 83,550
22% $40,526 to $86,375 $81,051 to $172,750 22% $41,776 to $89,075 $83,551 to $178,150
24% $86,376 to $164,925 $172,751 to $329,850 24% $89,076 to $170,050 $178,151 to $340,100
32% $164,926 to $209,425 $329,851 to $418,850 32% $170,051 to $215,950 $340,101 to $431,900
35% $209,426 to $523,600 $418,851 to $628,300 35% $215,951 to $539,900 $431,901 to $647,850
37% $523,601 + $628,301 + 37% $539,901 + $647,851 +
Source: Internal Revenue Service Source: Internal Revenue Service

Key Inflation-Adjusted Tax Numbers for 2022

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Individual income tax Taxable income
RATE SINGLE MARRIED, FILING JOINTLY
10% Up to $10,275 Up to $20,550
Investment-Tax Rates and Brackets
Congress hasn’t made changes to rates on long-term capital gains
and dividends for 2021 and 2022

Investors with taxable accounts—as opposed to tax-favored

retirement accounts such as individual retirement accounts or
401(k)s—are often eligible for lower tax rates and other benefits.
BUY AND HOLD
Long-term capital gains are
When an investor sells a holding in a taxable account, the result profits on investments held
is a capital gain or loss. That is the difference between the longer than a year. They are
taxed at favorable rates.
investment’s original cost (plus adjustments) and its selling
price. If an investor buys a share for $3 and sells it for $5, the
capital gain is $2. If that person buys another share for $3 and
sells it for $2, the capital loss is $1.

A key benefit is that capital losses can offset capital gains. If the investor in this
example sells both shares in the same calendar year, he or she would have a net
taxable capital gain of $1 after combining the $2 gain and the $1 loss. If total losses
exceed total gains, the net losses can offset up to $3,000 of “ordinary” income
such as wages per year.

Another benefit is that unused capital losses can be carried forward to offset
future capital gains and ordinary income.

Long-term capital gains are profits on investments held longer than a year. They
are taxed at favorable rates of 0%, 15% or 20%.

Short-term capital gains are those on investments held a year or less. They are
taxed at the higher rates that apply to ordinary income. This is a key distinction
frequent traders should be aware of.

The favorable lower rates for long-term gains also apply to dividends that are
“qualified,” which are most of them. Other dividends are taxed at the higher rates
for ordinary income like wages.

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Investment-Tax Rates and Brackets

THE 3.8% SURTAX

A 3.8% surtax applies to net investment Key Inflation-Adjusted Tax Numbers for 2021
Key Inflation-Adjusted Tax Numbers for 2021
income for most single filers with Taxable income Taxable income
Taxable income Taxable income
RATE* SINGLE MARRIED, FILING JOINTLY
adjusted gross income (AGI) above RATE* SINGLE MARRIED, FILING JOINTLY
0% Up to $40,400 Up to $80,800
0% Up to $40,400 Up to $80,800
$200,000 and most couples filing 15% $40,401 to $445,850 $80,801 to $501,600
15% $40,401 to $445,850 $80,801 to $501,600
20% $445,851 + $501,601 +
jointly with AGI above $250,000. This 20% $445,851 +
*Applies to gains on assets held longer than a year and qualified dividends.
$501,601 +
Source: Internal
*Applies to gainsRevenue Service
on assets held longer than a year and qualified dividends.
surtax applies only to the amount of Source: Internal Revenue Service

net investment income above those

thresholds, which aren’t indexed
for inflation.
Key Inflation-Adjusted Tax Numbers for 2022
For example, say that a single taxpayer Key Inflation-Adjusted Tax Numbers for 2022
Taxable income Taxable income
Taxable income Taxable income
has earned income such as wages and RATE* SINGLE MARRIED, FILING JOINTLY
RATE* SINGLE MARRIED, FILING JOINTLY
0% Up to $41,675 Up to $83,350
bonus totaling $150,000, plus a $60,000 0% Up to $41,675 Up to $83,350
$83,351–$517,200
15% $41,676–$459,750
15% $41,676–$459,750 $83,351–$517,200
taxable capital gain and $20,000 of 20% $459,751 or more $517,201 or more
20% $459,751 or more $517,201 or more
*Applies to gains on assets held longer than a year and qualified dividends.
dividends. This filer would owe the 3.8% Source: Internal
*Applies to gainsRevenue Service
on assets held longer than a year and qualified dividends.
Source: Internal Revenue Service

tax on $30,000, which is the amount of

his AGI above $200,000.

Because of the surtax, top-bracket

taxpayers typically owe 23.8% instead of 20% on their long-term gains and
dividends. Some investors in the 15% bracket for this income owe the 3.8%
surtax on part or all of it because their adjusted gross income is above the
$250,000/$200,000 thresholds.

Here’s another example. Say a single filer has $210,000 of adjusted gross income,
and $50,000 of that is a windfall from a long-term gain on an investment and
qualified dividends. In that case, all this taxpayer’s investment income would

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Investment-Tax Rates and Brackets

be taxed at a 15% rate. He or she would also owe an additional 3.8% on $10,000
because that’s the amount exceeding $200,000. So the rate on the $10,000
would be 18.8%.

HOW THE ZERO RATE APPLIES

Here is a simplified example. Say that Janet is a single taxpayer with $30,000 of
taxable ordinary income for 2021 after deductions and exemptions, such as for
tax-free municipal-bond interest. Her taxable income is subject to rates up to 12%,
as detailed in the income-tax brackets.

But Janet also has a $20,000 long-term capital gain. This “stacks” on top of her
$30,000 of taxable income, giving her total taxable income of $50,000. For 2021,
the 15% bracket for capital gains begins at $40,401 of taxable income for single
filers. As a result, Janet would owe zero tax on about $10,400 of her gain and 15%
on about $9,600 of it.

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Withholding and Estimated Taxes,
Including for Unemployment Benefits
Filers with uneven earnings or unemployment payments should check
for tax underpayments to avoid penalties

The U.S. income tax is a pay-as-you-go system. The law requires most employees
and self-employed business owners to pay at least 90% of their taxes long before
the April due date. This year, the due date for 2021 tax returns for most taxpayers is
April 18, 2022 (April 19 for residents of Maine and Massachusetts). Filing deadlines
may also be delayed for victims of federally declared disasters. Taxpayers can
request a six-month extension to file their returns, but that doesn’t delay the
requirement to pay what they owe.

With some exceptions, tax underpayments incur penalties based on current

interest rates. Recently this rate was 3%. To avoid these penalties, employees and
many retirees typically have taxes withheld from paychecks or Social Security and
pension payments over the course of the year.

Self-employed business owners and others who don’t have withholding instead
make quarterly estimated payments of their taxes based on earnings for that
quarter. For 2021, the deadlines for quarterly payments were April 15, June 15, Sept.
15 and Jan. 18, 2022. The deadlines for 2022 are April 18, June 15, Sept. 15, and Jan.
17, 2023. Tax payments made after the deadlines but before the April due date help
to reduce penalties.

Many Americans also received unemployment compensation in 2021. These

payments are taxable, and unlike in 2020 there’s no partial exemption. Recipients
should expect to receive a Form 1099-G for the total that is being reported to
the IRS.

The IRS has posted a calculator to help employees make withholding decisions, and
it has been updated for 2022.

For more information on withholding and estimated taxes, see IRS Publication 505.

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2021 Pandemic Stimulus Payments
Filers who qualify for higher payments than they received last year can claim those
amounts on 2021 tax returns. Look for an IRS letter.

In March 2021, Congress authorized a third round of stimulus payments of up

to $1,400 per household member—including adults, children, adult dependents
like college students and elderly relatives. These payments aren’t taxable, and
overpayments don’t need to be returned to the IRS in most cases.

To date, the IRS has sent more than 175 million third-round payments totaling
more than $400 billion, based on a filer’s 2019 or 2020 income. Some of these
were “top-up” payments for people who received an amount based on their 2019
income and then qualified for more based on 2020 returns they filed in 2021. That
could be, for example, because of a job loss or the birth of a child in 2020.

Because the stimulus payments were structured as an advance payment of a

tax credit for 2021, taxpayers can also qualify based on their 2021 income and
family situation if they haven’t received payments or are eligible for more. These
amounts are claimed as a Recovery Rebate Credit on line 30 of Form 1040; the
instructions have a worksheet to determine the correct amount.

“To date, the IRS has sent more than 175 million third-
round payments, based on a filer’s 2019 or 2020 income.”

Single filers with adjusted gross income of $75,000 or less, heads of household
with AGI of $112,500 or less and married joint filers with AGI of $150,000 or less
qualify for the full $1,400 payment. Above that, the phaseout for receiving a
partial payment is steep: Individuals with AGI of $80,000, heads of household with
AGI of $120,000 and married joint filers with AGI of $160,000 get nothing.

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2021 Pandemic Stimulus Payments

Here are examples of taxpayers who could qualify for rebate credits. Say that
a single filer received a partial stimulus payment based on 2020 income of
$78,000, and then her income dropped to $70,000 for 2021. In another case, a
married couple who received $2,800 of stimulus payments last spring had twins
in 2021, and their income was below $150,000 for the year.

In both cases the taxpayers can file for rebate credits on their 2021 tax returns.
The single filer can receive the portion of the $1,400 she didn’t receive last year,
and the couple can receive $1,400 for each child, or $2,800.

To receive the rebate credit, a tax filer typically needs a Social Security number—
although parents who don’t have these numbers can receive credits for children
who do have them. While Congress didn’t allow the IRS to use stimulus payments
to reduce tax debts or unpaid child support, Recovery Rebate Credits may be
subject to such offsets.

To help filers with record-keeping, the IRS has been sending letters in early
2022 to each person who received stimulus payments last year detailing the
total amount. Tax professionals are urging people to save these letters to ease
preparation of 2021 tax returns because mismatches will likely cause processing
and refund delays.

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State Taxes on Remote Work
People who work remotely may need to file in, and perhaps pay taxes
to, more than one state

The pandemic has turned millions of Americans into telecommuters. As one

Covid-19 variant has followed another, some companies have stopped trying to
predict when they will require employees to return to the workplace and on
what terms.

This shift often brings tax complexity for people working remotely in a state
different from the one where their office is, because they may have to file returns
and even pay taxes to more than one state.

The problem is that each state’s tax system is a unique mix of rules that consider
how long a worker is there, what income is earned, and the location of the worker’s
true home, or “domicile.” While some states give credits for taxes paid to different
states, others don’t—or the credit they give may not fully offset the tax paid.

As a result, out-of-state remote workers can wind up owing more, or the same,
or (rarely) less. Businesses often face a torrent of extra tax-filing requirements,
even if the amount of income paid to remote workers is relatively small.

A number of states passed special pandemic provisions for remote workers,

but these have mostly lapsed, according to Cathie Stanton, a member of the
American Institute of CPAs who monitors state taxes on remote work. Some
states are eyeing remote workers as a revenue source.

“People working remotely across state lines need to

research exactly what state taxes could apply to them.”

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State Taxes on Remote Work

“New York, Massachusetts, and North Carolina have always been aggressive,
but now I see Montana asking a Florida-based business owner about remote
work from his Montana home,” she adds.

The upshot is that people working remotely across state lines need to research
exactly what state taxes could apply to them.

How will a state know someone has worked there, especially if the
office is elsewhere? Both employers and tax preparers risk penalties for
misrepresentations on tax forms they prepare, so they will question workers or
clients. DIY filers using commercial software should remember that tax returns
are signed under penalty of perjury.

More information on this topic, including some tax rules for specific states,
is here.

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Cryptocurrency
The IRS is cracking down on cryptocurrency tax cheating

Cryptocurrency owners, beware: The IRS is trying to strip away excuses for
millions of people who aren’t complying with the tax rules on them, either
inadvertently or on purpose.

The agency has put a pointed question on the front page of the Form 1040, just
below the taxpayer name and address. It first appeared on the 2019 tax return in
a less prominent position and moved to its current place on the 2020 return.

On the 2021 return, the question has been reworded slightly: At any time during
2021, did you receive, sell, exchange or otherwise dispose of any financial interest
in any virtual currency?

“At any time during 2021, did you receive, sell,

exchange or otherwise dispose of any financial interest
in any virtual currency?” (Form 1040)

The tax filer must check the box “Yes” or “No.” Cryptocurrency owners who don’t
answer the question or are untruthful risk higher penalties if the IRS audits them,
as it will be hard to claim ignorance of the rules.

The agency also has other crypto enforcement efforts under way. In 2021, it
persuaded judges in Boston and San Francisco to approve summonses requiring
two crypto exchanges to turn over records for customers who had more than
$20,000 in transactions in any year from 2016 to 2020.

The IRS first released guidance on the taxation of cryptocurrencies in 2014. It said
that bitcoin and other cryptocurrencies are property, not currencies such as dollars
or euros. Often they are investment property akin to stock shares or real estate.

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Cryptocurrency

This means that if the crypto is held in a taxable account­—as opposed to

a retirement account like an IRA or Roth IRA—net profits from a sale are
typically taxed as long-or short-term capital gains, and losses can be used
to offset gains.

This tax treatment has benefits, but also important drawbacks. If crypto is
used to make a purchase—even of a sandwich—then the transaction typically
generates a taxable sale of the crypto that the buyer must report to the IRS.

For example, say that Jack buys a boat with $10,000 of cryptocurrency that he
purchased for $5,000. Jack’s transfer of the crypto is taxable. He has to report a
taxable gain of $5,000 to the IRS—much as if he bought the boat with shares of
stock that had grown from $5,000 to $10,000.

This makes cryptocurrencies a cumbersome substitute for cash.

In 2019, the IRS issued more crypto guidance, including rules for how holders
should treat cryptocurrencies if these undergo a reorganization that changes
the network protocol of coins or results in the distribution of new tokens. It said
that if a crypto owner receives something of value, then its fair market value is
taxable at ordinary income rates when the taxpayer has control of it.

In late 2020, the Financial Crimes Enforcement Network (FinCEN), a Treasury

Department unit separate from the IRS, announced it may require U.S.
taxpayers holding more than $10,000 of cryptocurrencies offshore to file
FinCEN Form 114, known as the FBAR, to report these holdings. This rule hasn’t
yet been adopted, so it wasn’t in effect for 2021.

For more detail on the taxation of cryptocurrencies, including tax triggers, lot
identification and wash sales, click here.

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Estate and Gift Tax
The expanded estate- and gift-tax exemption expires at the end of 2025

The federal estate-and gift-tax exemption applies to the total of an individual’s

taxable gifts made during life and assets left at death. Above the exemption, the
top rate on such transfers is 40%.

In 2017, Congress doubled the exemption starting in 2018, and the amount will
continue to rise with inflation through 2025. This expansion helped reduce the
number of taxable estates to about 1,300 for returns filed in 2020 from about
5,200 in 2017, according to the latest IRS data.

For 2021, the lifetime exemption

for both gift and estate taxes
2022 EXEMPTIONS was $11.7 million per individual, or
$12.06 MILLION $23.4 million per married couple.
PER INDIVIDUAL For 2022, an inflation adjustment

$24.12 MILLION has lifted it to $12.06 million per

individual, or $24.12 million
PER COUPLE
per couple.

The increase in the exemption is

set to lapse after 2025, but in 2019 the Treasury Department and the IRS issued
“grandfather” regulations. They allow the increased exemption to apply to earlier
gifts if Congress reduces the exemption in the future.

Here is a simplified example. Say that John gave assets of $11 million to a trust
for his heirs in 2020. This transfer was free of gift tax because the exemption was
$11.58 million for 2020.

Now, say that in 2022 Congress lowers the exemption to $5 million per person, and
John dies in 2023 when that lower exemption is in effect. Under current Treasury
rules, John’s estate won’t owe tax on any portion of his 2020 gift of $11 million,

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Estate and Gift Tax

even if $6 million of it is above the $5 million lifetime limit in effect at the time of
his death.

CAPITAL GAINS AT DEATH

Under current law, investment assets held at death aren’t subject to capital-gains
tax. This valuable benefit is known as the “step-up in basis.”

For example, say that Robert dies owning shares of stock worth $100 each that
he bought for $5, and he held them in a taxable account rather than a tax-favored
retirement plan such as an IRA.

Because of the step-up provision, Robert won’t owe capital-gains tax on the $95
of growth in each share of stock. Instead, the shares go into his estate at their full
market value of $100 each. Heirs who receive the shares then have a cost basis of
$100 each as a starting point for measuring taxable gain or loss when they sell.

THE ANNUAL GIFT-TAX EXEMPTION

For 2022, the annual gift-tax exemption has risen to $16,000 per donor, per
recipient. In 2021, this limit was $15,000.

Using this tax break, a giver can give someone else—such as a relative, friend or
stranger—assets up to the limit each year, free of federal gift taxes. This year, a
couple with two married children and six grandchildren could give away a total of
$320,000 to these 10 relatives, plus $32,000 to other individuals.

Annual gifts aren’t deductible for income-tax purposes, and they aren’t income to
the recipient.

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Estate and Gift Tax

“Gifts to pay tuition or medical expenses

can also be free of gift tax.”

Above the annual exclusion, gifts are subtracted from the giver’s lifetime gift–
and estate-tax exemption. However, a married couple can use a technique called
“gift splitting” that allows one spouse to make up to $32,000 of tax-free gifts per
recipient on behalf of both partners. In this case, the IRS says a gift-tax return
should be filed.

If the gift isn’t cash, the giver’s “cost basis” carries over to the recipient. For
example, say that in 2022 Aunt Margaret gives her niece, Linda, a share of long-
held stock worth $1,000 that she acquired years ago for $200. Neither Aunt
Margaret nor Linda owes tax on the gift. But Linda’s starting point for measuring
taxable gain when she sells will be $200. If she sells the share for $1,200, her
taxable gain would be $1,000.

Gifts of any amount to pay tuition or medical expenses are also free of gift tax. To
qualify for this break, the giver must make the payment directly to the institution.

BUNCHING GIFTS FOR COLLEGE

Using another strategy, givers can “bunch” five years of annual $16,000 gifts to a
529 education-savings plan, typically for children or grandchildren. In this case, a
gift-tax return should also be filed.

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 Section 2
Tax Deductions,
Credits and Exemptions

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Standard Deduction and
Personal Exemption
The temporary expansion of the standard deduction and repeal of the personal
exemption are continuing to affect millions of Americans

The standard deduction is the amount taxpayers can subtract from income if
they don’t break out deductions for mortgage interest, charitable contributions,
state and local taxes and other items separately on Schedule A. Listing these
deductions separately is called “itemizing.”

For 2021, the standard deduction is $12,550 for single filers

and $25,100 for married couples filing jointly. For 2022, it is LANDMARK SHIFT
In 2017, Congress made a
$12,950 for singles and $25,900 for married couples.
landmark change by nearly
In 2017, Congress made a landmark change by nearly doubling doubling the standard deduction,
the standard deduction, and the percentage of filers itemizing and the percentage of filers
itemizing deductions dropped
deductions dropped to about 11% in 2019 from about 31% in
to about 11% in 2019 from about
2017, according to the latest IRS data. This shift has simplified
31% in 2017.
returns for about 30 million filers and lightened the agency’s
burden by reducing the number of deductions it needs
to monitor.

However, taxpayers taking the standard deduction don’t get a specific tax break
for having mortgage interest or making charitable donations. (For 2021, Congress
is allowing charitable deductions of small amounts by filers who don’t itemize.)
That change will likely affect future decisions about making donations or owning
a home.

PERSONAL EXEMPTION REPEALED UNTIL 2026

In another landmark shift, Congress temporarily repealed the personal exemption

at the same time that it nearly doubled the standard deduction. This exemption
was a subtraction from income for each person included on a tax return—typically
the members of a family. The 2017 amount was $4,050 per person, and it phased
out for higher earners.

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Standard Deduction and Personal Exemption

The personal exemption was also integral to figuring out an employee’s correct
withholding from pay.

The interaction of the expanded standard deduction, repealed personal

exemption and the expanded child tax credit is complex, and the effects on
individuals have varied widely. In part that’s because the personal exemption
was a deduction from taxable income, while the child credit is a dollar-for-dollar
offset of taxes—and taxpayers can get it for 2021 even if they don’t owe
income taxes.

Both the personal-exemption repeal and the expanded standard deduction

expire at the end of 2025.

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Child Tax Credit
Two recent expansions of the child tax credit have helped millions of American parents.
But prepayments of them will confuse filers during the 2022 tax-filing season.

Congress has expanded the child tax credit twice since 2017, and these expansions
have put needed dollars in the pockets of many parents. However, prepayments of
the credits during 2021 will also create confusion during the 2022 tax-filing season
and could leave some recipients owing unexpected tax bills
for 2021. Here’s what parents need to know.
EXPANDED CHILD CREDIT
As part of the 2017 tax overhaul, Congress doubled the As part of the 2017 tax overhaul,
existing child tax credit to $2,000 per child under age 17 at Congress doubled the existing
child tax credit to $2,000 per
year-end. It is a dollar-for-dollar reduction in taxes that a
child under age 17 at year-end.
range of filers can claim, because it begins to phase out at
This expanded child credit is in
$400,000 of adjusted gross income for married joint filers effect for 2021 and 2022, and it
and $200,000 for single filers. expires at the end of 2025.

This expanded child credit is in effect for 2021 and 2022, and it
expires at the end of 2025.

Last March, Congress added a second expansion of the credit just for 2021, as part
of its pandemic response. It’s up to $1,600 per child under age 6 and $1,000 per
child ages six through 17 as of Dec. 31, 2021. Also, just for 2021, the first expansion
of the child credit applies to dependents who were 17 at year-end.

This means that for 2021 the total maximum child tax credit is $3,600 per child
under six and $3,000 per child from ages six to 17 at year-end. The full credit is
refundable and available even to tax filers who have no income and owe no tax.

The income limits are lower for the 2021 expansion, however: The phaseout begins
at $75,000 of adjusted gross income for most single filers and $150,000 for most
married joint filers. Above that, the taxpayer loses $50 of this credit for every
$1,000 of income, so the cap on it varies according to income, number of children

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Child Tax Credit

and filing status. The phaseout of this credit is separate from the one for the
2017 expansion, so many parents will still qualify for a $2,000 credit per child
even if they don’t qualify for the 2021 expansion of $1,000 or $1,600 per child.

In a historic move, Congress also directed the IRS to use existing records to send
families monthly prepayments of up to half their total anticipated 2021 child tax
credits. These prepayments began in July and continued for six months, usually
by direct deposit. They have halted for 2022 because Congress hasn’t extended
this tax break, although some lawmakers hope to do so.

What will confuse taxpayers this filing season is that last year’s prepayments
must be reconciled on Schedule 8812 of 2021 tax returns based on actual
income and circumstances for the year. Many taxpayers will be due more money
from the child credits than they received in prepayments, while others may have
gotten prepayments they don’t qualify for.

As a result of the prepayments, however, many filers will receive lower than
expected refunds or face a higher balance due on their 2021 returns.

Here’s a simplified example: Say a married couple with two children over age
5 and $220,000 of income got a $500 tax refund last year on their 2020 return.
Their 2021 income was similar, so they didn’t qualify for the 2021 expansion
of the child credit. But they still qualified for two child credits of $2,000 each,
and they received half of that in six monthly payments of about $333 starting
last July.

“Parents of children born or adopted in 2021 can claim

child tax credits for them on their returns, but the
children need a Social Security number.”

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Child Tax Credit

When this couple prepares their 2021 return, the $2,000 of prepayments won’t
be available to offset taxes due because they have already received it. Instead of
getting an expected refund of $500, they could face the unwelcome surprise of
owing the IRS $1,500.

Confusion over the child credit will also affect many divorced or separated couples
who have agreed to claim it in alternate years. In that case, the parent who
received prepayments last year based on the 2020 tax return likely won’t be the
one who takes the credit for 2021. These prepayment recipients will likely have to
pay all or part of them back, unless their income is below $40,000 for single filers
or $60,000 for couples filing jointly.

To help taxpayers navigate child-credit issues, the IRS sent letters early this year
detailing what the parent received in prepayments. Taxpayers should save these
letters for use in preparing their own returns and double-check their records to
make sure the letters are accurate. The letter has a dedicated IRS phone number
to call about discrepancies.

Parents of children born or adopted in 2021 can claim child tax credits for them on
their returns, but the children need a Social Security number. The expanded child
tax credits don’t alter longstanding rules defining who is a dependent, described in
IRS Publication 501.

The 2021 tax credit for dependents age 18 and older at year-end, such as an
older child or elderly relative, is up to $500. For 2022, this credit is set to apply to
dependents age 17 and older at year-end.

For more information, click here.

Here are the instructions for Schedule 8812.

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State and Local Tax Deductions (SALT)
The limit for deducting state and local taxes is $10,000 per return, but there is a
workaround for some business owners

Since the 2017 tax overhaul, the deduction for state and local
property and income or sales taxes has been capped at $10,000
STATES WITH THE
per return. Previously these deductions were unlimited for HARDEST-HIT
individuals, although many people who owed the alternative TAXPAYERS:
minimum tax lost the benefit of some or all of their SALT • New York
• California
write-offs.
• Connecticut
The $10,000 cap expires at the end of 2025. • New Jersey
• Maryland
Here is how it works. Say that Ed and Jane are married joint • Oregon
filers who paid $8,000 of state income tax and $6,000 of • Massachusetts
property tax on their home. Before 2018, they could deduct the
$14,000 total of these taxes if they itemized on Schedule A.

But for tax years 2018-2025, the couple’s deduction for state and local taxes is
capped at $10,000 per return, and that amount isn’t indexed for inflation. This
change has prompted many filers to switch to taking the standard deduction
rather than itemizing on Schedule A.

The SALT cap affects many married couples more than singles, because the
$10,000 SALT limit is per return, not per person.

Can two spouses file separately and claim two $10,000 deductions? No. Although
married couples can file separate returns, each spouse would get a $5,000
deduction for state and local taxes. To qualify for two $10,000 deductions, the
couple would have to divorce and file as two single taxpayers.

According to the Tax Foundation, the SALT cap has hit hardest in eight high-tax
jurisdictions. New York, California, the District of Columbia, Connecticut, New
Jersey, Maryland, Oregon, and Massachusetts. It has had the least impact in
Alaska, South Dakota, Tennessee, North Dakota, Washington, New Mexico,
Texas and West Virginia.

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State and Local Tax Deductions (SALT)

Since the SALT cap was imposed, a number of wealthy people, including former
President Donald Trump, have left high-tax northeastern states for Florida, which
doesn’t have a state income tax. Some other residents of high-priced areas have
pulled up stakes as well.

In response to the cap, lawmakers in some states have adopted strategies to

preserve the deductibility of state and local taxes. The most popular is a provision
for owners of “pass-through” businesses such as partnerships, S Corporations,
and limited-liability companies that typically pass profits and losses through to
the owners for inclusion in their own taxable income.

These workarounds allow pass-through owners to deduct state taxes from their
business income by having the business elect to pay the taxes at the entity level.
As a result, a smaller amount of taxable income passes through to the owner’s
personal return, where state taxes paid on it are subject to the $10,000 SALT cap.
The Treasury Department issued guidance allowing such changes in November
2020 but hasn’t issued regulations explaining them.

According to state-tax specialist Jamie Yesnowitz of Grant Thornton, at least

21 states have SALT workarounds for the 2022 tax year, including New York,
California and Illinois. Several other states are considering it in 2022 legislative
sessions. Mr. Yesnowitz notes that the workarounds reduce state taxes on
business income but not on wages, investment income or property.

In January 2022, The Wall Street Journal reported that New York business owners
were using the workaround to bypass billions of dollars in federal taxes.

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Mortgage-Interest Deduction
The expansion of the standard deduction and a lower limit on deductible mortgage
debt mean fewer filers are taking this popular write-off

The number of taxpayers claiming mortgage interest deductions on Schedule A

has dropped sharply since the 2017 tax overhaul enacted both direct and indirect
curbs on them. For 2019, about 13 million filers claimed the deduction vs. about 33
million for 2017, according to the latest IRS data.

A key reason for the change: Millions more filers are claiming the expanded
standard deduction rather than itemizing write-offs separately on Schedule A. For
example, a married couple won’t benefit from itemizing if their mortgage interest,
state and local taxes and charitable contributions total less than their standard
deduction amount of $25,100 for 2021 or $25,900 for 2022.

In addition, Congress in 2017 imposed new limits on the amount of mortgage debt
that new purchasers can deduct interest on.

LIMITS ON ELIGIBLE MORTGAGE DEBT

Limits apply for taxpayers taking mortgage-interest deductions, and they are
more generous for homeowners with older mortgages.

Homeowners with existing mortgages taken out on or before Dec. 15, 2017 can
continue to deduct interest on a total of $1 million of debt for a first and second
home. For mortgages issued after Dec. 15, 2017, homeowners can deduct interest
on a total of $750,000 of debt for a first and second home. These limits aren’t
indexed for inflation.

Here’s an example. If John had a $750,000 mortgage on a first home and a

$200,000 mortgage on a second home as of Dec. 15, 2017, he can continue to
deduct the interest on both loans on Schedule A. But if he bought one home with
a $750,000 mortgage in 2015 and then bought a second home with a $200,000
mortgage in 2020, he can’t deduct the interest on the second loan.

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Mortgage-Interest Deduction

MORTGAGE REFINANCING

Homeowners can refinance mortgage debt up to $1 million that existed on Dec.

15, 2017 and still deduct the interest. But often the new loan can’t exceed the
amount of the mortgage being refinanced.

Here’s an example provided by Evan Liddiard, a CPA with the National

Association of Realtors: If Emily has a $1 million mortgage she has paid down
to $800,000, she can refinance up to $800,000 of debt and continue to deduct
interest on it. If she refinances for $900,000 and uses $100,000 of it to make
substantial improvements to the home, she could deduct the interest on
$900,000, according to Mr. Liddiard.

But if Emily refinances for $900,000 and uses $100,000 to pay her children’s
tuition, rather than home improvements, then she can deduct interest on only
$800,000 of the refinancing.

HOME-EQUITY LOANS AND LINES OF CREDIT (HELOCS)

The law now prohibits interest deductions for such debt unless the funds are
used for certain types of home improvements. Before 2018, homeowners
could deduct the interest on up to $100,000 of home-equity debt used for any
purpose.

To be deductible now, the borrowing must be used to “buy, build or substantially

improve” a first or second home. The debt must also be secured by the home
it applies to, so a Heloc on a first home can’t be used to buy or expand a
second home.

For more information and a list of improvements that are eligible, see IRS
Publications 936 and 523.

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Charitable-Donation Deduction
For 2021, but not 2022, taxpayers who don’t itemize on Schedule A
can deduct some charitable donations

During the pandemic, Congress temporarily expanded tax deductions for

charitable donors. This expansion expired at the end of 2021.

For 2021, single filers who don’t itemize deductions on Schedule A can deduct up
to $300, and married joint filers can deduct up to $600.

These donations must be of cash—such as by check, credit card or similar

transfer—rather than property such as used clothing or furniture, and they can’t be
made to donor-advised funds. As with other donations, the gifts had to be made
by year-end to be deductible for 2021.
For 2021, those who
The normal rules for proving these
don’t itemize can deduct
write-offs apply as well. Often the
$300 donor needs a letter in hand from the
Single Filers charity detailing the deduction before

$600 filing his or her tax return.

Married Joint Filers Also for 2021, most donors of large

amounts can immediately deduct
cash gifts up to 100% of their adjusted gross income. Absent this provision,
the AGI limit would be 60% for cash donations and lower for others such as
appreciated stock, although excess deductions could carry over for use in
future years.

The $300/$600 deductions for non-itemizers respond to charities’ concerns

following the 2017 tax overhaul. While it didn’t limit charitable deductions
outright, the near-doubling of the standard deduction has meant that far
fewer taxpayers now benefit from a specific break for charitable giving.

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Charitable-Donation Deduction

According to the most recent IRS data, the number of taxpayers itemizing
charitable donations dropped to about 13 million for 2019 from about 37 million
in 2017.

Still, donors who want to maximize tax deductions for donations have options for
doing so.

A simple one is to “bunch” donations every few years to get

over the hurdle of the higher standard deduction. For example, DONATION STRATEGY
say that Jane and Robert typically donate $10,000 per year Donors who want to maximize
to charity, but they’ve paid off their mortgage and their SALT tax deductions for donations
have options. One is to “bunch”
deduction is now capped at $10,000.
donations every few years to
As a result, taking the 2021 standard deduction of $25,100 still get over the hurdle of the
makes more sense for the couple than itemizing deductions on higher standard deduction.
Schedule A—and they would get that deduction without making
any donations.

But say that Jane and Robert instead donate $20,000 every other year rather
than $10,000 every year. The larger donation plus their $10,000 SALT deduction
means it makes sense to itemize for the years they make donations and then claim
the standard deduction for the other years.

Another valuable strategy for givers is to donate appreciated investments

held longer than a year, such as stock shares or cryptocurrencies. In this case
the donor can receive a deduction for the asset’s fair market value without owing
tax on the appreciation, although conditions apply. For example, crypto owners
need a formal appraisal if they want to deduct a donation of more than $5,000
of cryptocurrency.

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Charitable-Donation Deduction

Charitable givers using these strategies may want to consider so-called donor-
advised funds. These popular accounts enable donors to bunch smaller gifts into
one large amount and take a deduction in the year of the gift. The donor then
recommends later which charities will be recipients of gifts. Meanwhile, the assets
can be invested and grow tax-free, although the accounts have fees.

Donors who are 70½ or older have another good strategy if they have individual
retirement accounts. Many can benefit from contributing up to $100,000 of IRA
assets directly to one or more charities, as noted in Retiree Tax Issues.

For more information, see IRS Publication 526, Charitable Contributions.

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Medical-Expenses Deduction
The income threshold for deducting medical expenses is 7.5%

In 2020, Congress enacted a permanent threshold for taking deductions for

medical expenses. Filers can deduct eligible expenses only to the extent that they
exceed 7.5% of their adjusted gross income.

Relatively few taxpayers benefit

from this write-off because their

7.5% deductible expenses don’t exceed

the threshold. But it covers a wide
Income threshold above
range of unreimbursed costs when it
which medical expenses does apply and it is valuable to filers
are deductible with large medical expenses such as
nursing-home costs. Other eligible
costs include insurance premiums
paid with after-tax dollars, acupuncture, menstrual products, prostheses,
eyeglasses, and even a wig if needed after chemotherapy, among other things.
This deduction is only available to taxpayers who itemize.

For more information and a detailed list of eligible expenses, see

IRS Publication 502.

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Retirement-Savings Accounts
The contribution limit for some accounts is higher for 2022

To encourage saving for retirement, Congress has provided Americans with an

array of tax-favored accounts. Some, such as 401(k) and 403(b) accounts, are
sponsored by employers. Others, including most individual retirement accounts,
are owned and funded by individuals. Still others, such as Solo 401(k)s, are for self-
employed workers.

These accounts typically have annual limits on contributions and often income-
eligibility requirements, as well. Savers or their spouses also must have at least as
much earned income—such as from wages, not investments–as the amount of the
contribution to them. Other limits can apply.

In addition, tax-favored savings plans have restrictions as to when money in these

accounts can be withdrawn and when it must be withdrawn, for the saver to avoid
penalties. For example, withdrawals before age 59 ½ are often subject to a 10%
penalty if the saver received a tax deduction on contributions to the account.

Assets within retirement accounts typically grow tax-deferred, but other features
vary according to the type of account. Contributions to traditional IRAs and 401(k)
plans are often tax-deductible, and withdrawals are taxed at the same rates as
ordinary income like wages—not the lower rates for long-term capital gains.

With Roth IRAs and Roth 401(k)s, the opposite is the case: Contributions aren’t
tax-deductible going in, but withdrawals can be tax-free. Roth accounts can be a
good choice for savers who expect their tax rate to be lower when contributions
are made than when they are withdrawn.

For both 2021 and 2022, the limit on contributions to traditional IRAs and Roth
IRAs remains $6,000, plus $1,000 for those age 50 and above. Currently there is
no age cap for individuals contributing to traditional IRAs.

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Retirement-Savings Accounts

The limit on contributions to regular 401(k) and Roth 401(k) plans is higher. For
2021, it is up to $19,500 per worker, plus $6,500 for those age 50 and older. For
2022, it is $20,500 due to an inflation adjustment, plus $6,500 for savers age 50
and older.

For 2021, the limit on contributions to SEP IRAs and Solo 401(k) plans is $57,000,
plus $6,500 for Solo 401(k) plans for people who are age 50 and above. For 2022,
the limit has risen to $61,000, plus $6,500 for Solo 401(k) plans for those 50
and above.

For more information IRA contributions, see IRS Publication 590-A.

For more information on IRA withdrawals, see IRS Publication 590-B.

The deadline for contributing to traditional IRAs and Roth IRAs is the April tax
deadline of the following year. So most savers have until April 18, 2022 to make
contributions for 2021.

In many cases, savers with SEP IRAs and Solo 401(k)s can make contributions for
2021 until Oct. 17, 2022 if they have an extension to file their returns.

ROTH IRA CONVERSIONS

Savers can convert all or part of a traditional IRA to a Roth IRA, but they will owe
income tax on the transfer. This switch can make sense for people who expect
their future tax rates to be higher than their current tax rate, especially if they
will pay the taxes due on the transfer of funds outside the account. Future tax-
free withdrawals from the Roth accounts won’t push the saver into a higher tax
bracket or trigger higher Medicare premiums.

“The deadline for contributing to traditional

IRAs and Roth IRAs is the April tax deadline of
the following year.”

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Retirement-Savings Accounts

Savers can no longer undo a Roth conversion by “recharacterizing” it later.

INHERITED IRAS

Because of a law change, heirs of Roth or traditional IRAs whose original owners
died after Dec. 31, 2019 must now empty the accounts within 10 years. Annual
payouts aren’t required during this period.

The law has exceptions to the 10-year payout for some heirs, including surviving
spouses. They can continue to stretch required payouts—and taxes on them—over
many years. For minor children of the deceased IRA owner, the 10-year withdrawal
period often begins when they reach the age of majority, which is 18 in most
states. Students may be able to delay the 10-year period up to age 26.

For more information, see IRS Publication 590-B.

If the original owner died before 2020, the heirs can often take required
withdrawals over many decades, a technique known as the Stretch IRA.

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Flexible Spending Accounts and
The Dependent-Care Credit
The pandemic prompted Congress to loosen the rules for workers who use pretax
dollars to pay for certain healthcare and dependent-care expenses.

Flexible spending accounts (FSAs) are employer-sponsored plans that allow

workers to set aside pretax dollars to pay certain unreimbursed expenses.

Funds in healthcare FSAs are for healthcare expenses such as glasses, over-the-
counter medication, menstrual-care products, or a wig after chemotherapy. Funds
in dependent-care accounts can reimburse parents for after-school programs or
summer camp, among other things. Workers’ contributions to FSAs aren’t subject
to federal payroll taxes, or in many cases, state taxes.

For healthcare FSAs, the limit per employee for 2021 was $2,750, so a couple could
put up to $5,500 if plans were offered by both employers. For 2022, that limit rises
to $2,850.

For dependent-care FSAs, the limit is usually $5,000 per family, with no
adjustment for inflation, and other requirements may apply if one spouse has little
or no earned income.

Just for 2021, Congress raised the limit for dependent-care accounts to $10,500
because of the pandemic, and it also raised the child’s age limit from 12 to 13 for
claiming reimbursements from these accounts. For workers to make use of these
changes, company plans usually had to opt into them.

Even with higher limits, however, many workers didn’t increase dependent-care
FSA contributions for 2021 due to pandemic uncertainties. For example, some
worried whether their daycare provider would remain open, while others were able
to work from home and needed less child care or none.

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Flexible Spending Accounts and
The Dependent-Care Credit

Many other dependent-care FSA participants didn’t use all the money in their
accounts. In response, Congress allowed workers to carry over unused funds from
2021 to 2022, or for up to 12 months for companies with plans on fiscal years.

CHILD- AND DEPENDENT-CARE TAX CREDIT

The tax code has a credit for dependent-care expenses for children under age 13
when the care was provided, and it also can apply to expenses for others of any
age who are incapable of caring for themselves—such as an elderly relative.

In most years—including 2022—many filers get a credit for 20% of up to $3,000 of

eligible expenses for one dependent, or up to $6,000 of expenses for two or more.
For very low earners, the credit can be as high as 35% of these expenses.

“For middle-and upper-earning parents whose marginal

rate is above 15%, funding a dependent-care FSA often
lowers taxes more than the child-care credit.”

Melissa Labant, a tax principal with CLA, says that for middle- and upper-
earning parents whose marginal tax rate is above 15%, funding a tax-deductible
dependent-care FSA often lowers taxes more than the child-care credit. After
maxing out their FSAs, these parents can then claim the tax credit for care
expenses that exceed their FSA reimbursements. (No double-dipping is allowed.)

Just for 2021, however, Congress greatly expanded the child- and dependent-care
credit by raising the credit’s top rate to 50% and increasing the allowed expenses
to $8,000 for one dependent and $16,000 for two or more. It also made this credit
refundable, so filers can receive a payment even if they don’t owe income taxes.
The expansion often applies to expenses for care of non-child dependents as well.

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Flexible Spending Accounts and
The Dependent-Care Credit

The 2021 benefit has a complex phaseout and ends at $438,000 for most married
joint filers, so it will increase dependent-care benefits for a range of taxpayers.

For example, say that an office worker incurred $12,000 of eligible child-care
expenses for two young children last year. But she only put $2,000 in her
company’s dependent-care FSA, fearing the day-care center would close due to
the pandemic.

In this case, says Ms. Labant, this worker could receive $2,000 of reimbursements
from the 2021 FSA plan and then take the dependent-care tax credit on the
remaining $10,000 of expenses, rather than on $4,000 as in other years. The
expanded credit could reduce the worker’s 2021 taxes by up to $5,000, depending
on income.

For more information, talk to your employer and see IRS Publication 503.

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Home-Sellers’ Exemption
This popular benefit ensures that most homeowners don’t owe tax
on the sale of their home

Married couples filing jointly can exclude up to $500,000 of net profit on the sale
of a primary home from taxes. For single filers, the exemption is $250,000. These
amounts aren’t indexed for inflation.

For example, say that a married couple bought a home many years ago for
$120,000 and later made $100,000 of improvements. This year, they sell the home
for $600,000.

The gain, or profit, on the sale is $380,000. All of it would be exempt from capital-
gains tax due to their $500,000 exemption.

To be eligible for this benefit, the homeowner typically must have used the house
as a primary residence for two of the previous five years. In general, taxpayers
aren’t eligible for the full exemption if they excluded the gain from the sale of
another home during the two years before the sale.

Surviving widows and widowers have until two years after the spouse’s date of
death to sell and qualify for the $500,000 exemption rather than a $250,000
benefit, as long as the survivor hasn’t remarried. The survivor will also likely get
a “step-up” in cost basis on half of the home’s value (in most states) or all of the
home’s value (in community-property states). This will lower capital-gains taxes
on the home sale, if any are owed.

Other limits and exceptions apply, such as for military personnel or the sale of a
primary home that previously was used as a second home. Many more details on
this exemption are here.

Also see IRS Publication 523, Selling Your Home.

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Other Deductions, Such as For
Home Offices and Schoolteachers
Taxpayers can’t deduct a range of expenses that were once allowed, such as
for a home office used by an employee working remotely

The 2017 tax overhaul disallowed many miscellaneous deductions that taxpayers
claimed on Schedule A. These changes generally expire at the end of 2025.

As a result, employees can’t deduct their home-office expenses—a benefit that

would be useful to millions still working at home. (Business owners can still take
deductions for home offices.)

However, employers can receive a tax benefit from reimbursing remote workers
for a range of costs. If a firm reimburses its staffers for, say, office equipment or
faster internet they need for their work, the company can likely deduct the costs
on its own tax return.

“Also suspended is the deduction for investment-

advisory fees, which affects many investors.”

Other miscellaneous deductions repealed until 2026 include write-offs

for unreimbursed expenses for employee travel, meals and entertainment;
union dues; safe-deposit box fees; tax-preparation fees; and subscriptions,
among others.

Also suspended is the deduction for investment-advisory fees. This change

affects investors who pay fees for advice based on a percentage of their assets,
including many with tax-efficient separately managed accounts. It can also apply
to investors in hedge funds or other funds structured as partnerships, if they owe
tax on profits before fees are deducted.

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Other Deductions, Such as For
Home Offices and Schoolteachers

Under prior law, many taxpayers found the deduction for miscellaneous expenses
hard to qualify for, because total eligible expenses had to exceed 2% of adjusted
gross income.

Also on Schedule A, lawmakers curtailed the deduction for most casualty and
theft losses other than from federally declared disasters. Some other itemized
deductions are still allowed, such as for certain gambling losses. They are listed in
the instructions for Schedule A.

Elsewhere on the return, Congress ended the deduction for moving expenses by
taxpayers who aren’t in the military. However, educators can deduct unreimbursed
expenses for classroom supplies, even if they don’t itemize on Schedule A. The
deduction is for up to $250 of expenses for 2021, and up to $300 for 2022.

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Tax Breaks for Education
The Lifetime Learning Credit has been expanded and the tuition and fees
deduction has been repealed

Late in 2020, Congress permanently repealed the longstanding tuition and fees
deduction, beginning in 2021, and expanded the Lifetime Learning Credit. It and
the American Opportunity Credit are now the principal tax credits for education.

For 2021 and beyond, both credits now have the same income phaseout range:
$80,000 to $90,000 of adjusted gross income for most single filers, and $160,000
to $180,000 for most married couples filing jointly. These limits aren’t adjusted
for inflation.

But they apply differently. The American Opportunity Credit provides a maximum
tax reduction of $2,500 per student per year, which is composed of 100% of the
first $2,000 of eligible expenses and 25% of the next $2,000. In general, it is
available for the first four years of postsecondary education, and it applies to
tuition and course-related expenses, not room and board.

“The American Opportunity Credit provides a maximum

tax reduction of $2,500 per student per year.”

The Lifetime Learning Credit is typically less generous, but applies to a broader
range of education expenses. It is a tax offset of 20% of up to $10,000 of eligible
expenses, or up to $2,000 per taxpayer per year. It can be used not only for
undergraduate education but also for graduate education, continuing education,
and jobs-skills classes even if the skills aren’t related to current employment.

A taxpayer can’t claim more than one of these credits for the same student
per year.

For more information, see IRS Publication 970.

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Tax Breaks for Education

DEDUCTION FOR STUDENT-LOAN INTEREST

Taxpayers with student-loan interest can typically deduct up to $2,500 of it

a year. This limit applies per tax return, so it is the same both for singles and
for married couples filing jointly. For tax year 2021, the deduction phases
out beginning at $70,000 of adjusted gross income for most single filers
and $140,000 for most married joint filers. For 2022, the phaseout begins at
$70,000 for most single filers and $145,000 for most married joint filers. (The
reason for the difference between years in the phaseout level for married joint
filers is due to inflation-adjustment methodology.)

In 2017, Congress made an important change for people with student loans who
die or become disabled: Forgiveness of such debt due to death or disability is no
longer taxable. In 2021 pandemic legislation, lawmakers also said forgiveness of
student loans wouldn’t be taxable through 2025. These provisions expire at the
end of 2025.

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529 Education-Savings Accounts
These plans can be used to pay up to $10,000 of private school tuition and up to
$10,000 of student-loan debt, but clarifications are needed in some states

Named after a section of the tax code enacted more than two decades ago, 529
accounts allow savers to contribute dollars after federal taxes have been paid on
them. The assets then can be invested and grow free of federal and state taxes.

Withdrawals from these accounts are tax-free if they are used to pay eligible
education expenses such as college tuition, books, and often room and board.

These plans are popular with middle-

and upper-income families. Assets

$10,000 in 529 plans grew to $464 billion in

June 2021 versus $165 billion a decade
Amount from a
earlier, according to Mark Kantrowitz,
529 account that may
a college-savings specialist.
be used to pay student-
loan debt Most 529 plans are offered by states,
and nearly all states and the District
of Columbia have them. More than
30 states offer a tax break for contributions, according to Mr. Kantrowitz. Savers
dissatisfied with their own state’s investment offerings or fees can go elsewhere,
although investment options are limited in most plans.

PAYING FOR K-12 EDUCATION

Since 2018 Congress has allowed 529 plan assets to be used to pay up to $10,000
per student, per year, for tuition for K-12 students. This change provides more
flexibility to savers with 529 plans.

Private schools will likely want to know about families’ 529 savings and may take
that information into account when making financial-aid decisions. Those who
want to use this break should also check carefully to make sure these withdrawals
are approved for their specific 529 plan, as some don’t allow them.

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529 Education-Savings Accounts

USING 529 ASSETS TO PAY STUDENT LOANS

Parents and others with 529 education-savings accounts are now able to take
tax-free withdrawals for repayments of some student loans for each beneficiary
and beneficiary’s siblings. There is a lifetime limit of $10,000 per borrower. Not
all states have adopted this rule, and a 529 payout for student debt may incur
state tax.

In addition, some costs for apprenticeships are eligible for tax-free withdrawals
from 529 accounts.

TRANSFERS TO ‘529 ABLE’ ACCOUNTS

In another significant change in 2017, Congress enabled savers to transfer

funds from 529 plans to 529 ABLE accounts. ABLE accounts are for people
who became blind or disabled before age 26, and they don’t limit the person’s
access to Medicaid and Supplemental Security Income (SSI) benefits or federal
student aid.

Like 529 plans, 529 ABLE accounts allow assets to grow tax-free. Annual
contributions are capped at $15,000 for 2021 and $16,000 for 2022.
Withdrawals can be tax-free if used to pay expenses such as housing, legal
fees and employment training. Total assets in an account can reach $100,000
without affecting SSI benefits.

The 2017 change allows annual transfers—$15,000 for 2021 and $16,000 for
2022—from a regular 529 plan to a 529 ABLE account. The ability to make such
transfers avoids a significant drawback.

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529 Education-Savings Accounts

It is that after the disabled person’s death, remaining funds in an ABLE account
typically go to the state to repay benefits if the person was receiving Medicaid—
as many are. But under current rules, someone could fund a 529 account for a
disabled person and transfer money from it as needed to a 529 ABLE account,
according to Mr. Kantrowitz. This arrangement offers tax-free growth and perhaps
a state-tax deduction, without giving up ownership of assets.

Owners of 529 and 529 ABLE accounts who want to use this benefit should check
their state plans to make sure it is allowed.

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 Section 3
Beyond the Basics

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Retiree Tax Issues
Congress suspended required payouts from retirement accounts for 2020,
but it hasn’t done so for 2021

STANDARD DEDUCTION

The near-doubling of the standard deduction has been positive for many retirees.
For single filers it is $12,550 for 2021 and $12,950 for 2022, while for married
couples filing jointly it is $25,100 for 2021 and $25,900 for 2022. The expanded
standard deduction expires at the end of 2025.

The standard deduction is the amount taxpayers deduct if

they don’t list write-offs for state taxes, charitable donations,
mortgage interest and such on Schedule A. Many retirees who ADDITIONAL
have paid off their mortgages take the standard deduction. STANDARD DEDUCTION
People age 65 and older are
Moreover, an “additional standard deduction” continues to apply eligible to take the additional
for taxpayers age 65 and older. For single filers, it’s $1,700 for standard deduction.
2021 and $1,750 for 2022. For married couples filing jointly, it’s FOR 2022:
$1,350 for 2021 and $1,400 for 2022 for each spouse age 65 and • $1,750 for singles
• $1,400 for each partner of
older.
a married couple
IRA WITHDRAWALS

Due to the pandemic, Congress suspended required minimum

distributions from retirement accounts such as traditional IRAs for 2020, but
lawmakers didn’t pass a similar measure for 2021. This change
must be made by Congress, not the IRS. Under current law, Roth IRA owners
don’t have required annual payouts.

For people born after June 30, 1949, required minimum payouts from these
accounts begin in the year they turn 72, while savers born on or before that date
had to begin withdrawing at age 70 ½.

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Retiree Tax Issues

Required withdrawal amounts are based on the account’s value as of the prior
Dec. 31. Savers have until the following April 1 to make their first required
withdrawal, but advisers often discourage waiting because then the saver will
have two required withdrawals in the second year, possibly pushing him or her
into a higher tax bracket.

For all years after the first, required withdrawals must be made by year-end.

For 2022 and later years, the IRS has updated the life expectancy tables used
to calculate withdrawals. The revised tables typically assume longer lifespans,
resulting in lower required payouts.

For more information on required withdrawals, see IRS Publication 590-B.

IRA CHARITABLE TRANSFERS

This popular benefit allows retirees who are 70½ or older to donate IRA assets
up to $100,000 directly to one or more charities and have the donations count
toward their required annual payout.

For IRA owners who give to charity, this is often a tax-efficient move. Donors
can take the standard deduction and still receive a tax break for their giving.

While there is no deduction for gifts of IRA assets, the withdrawal doesn’t
count as taxable income. This can help reduce Medicare premiums that rise with
income and taxes on other investment income, among other things. However,
these transfers can’t be made to a donor-advised fund.

Givers should also make sure they account for the charitable transfer on their
tax return. IRA sponsors such as brokers and banks typically record the gross
withdrawal on the 1099-R, not the net amount after the donation.

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For Widows and Widowers
The loss of a spouse often leaves the survivor facing confusing tax issues

The death of a spouse often combines emotional upheaval with the need to make
key decisions and deal with tax complexities. Here are issues to consider.

FILING AN ESTATE-TAX RETURN

Executors don’t need to file a return if the decedent’s estate is below the total
lifetime exemption for taxable gifts made during life and assets left at death. This
exemption was $11.7 million per individual for 2021 and is $12.06 million for 2022.

They may want to file one, however, as the surviving spouse can often add the
partner’s unused exemption to their own. This could help if Congress lowers the
gift- and estate-tax exemption in the future.

Estate taxes are normally due nine months after the date of death. But the IRS
allows executors to claim the unused exemption for the spouse up to two years
after the date of death, in many cases.

TAX-BRACKET SHIFTS

The year of death is the last one for which a couple can file jointly. After that,
the survivor files either as a single person or, if there are dependent children,
as a surviving widow or widower. Surviving widow(er)s retain the benefits of
joint filing for up to two years after the year of the spouse’s death, and then they
typically file as head of household.

Surviving spouses should be aware that even if their income drops, their top tax
rate may not drop—and could even rise—as a result of shifting from joint-to single-
filing status. Some call this “the widow’s penalty.”

For example, say that a couple had $225,000 of taxable income and a top tax
rate of 24% for 2021. If one spouse died last year and the survivor has $180,000
of taxable income this year, he or she will face a top tax rate of 32% for 2022 even
with about 20% less income.

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Suggestion: Consider accelerating income, such as from asset sales, while joint-
filing rates and brackets are still available. If income drops in the year of death,
say because of large medical-expense deductions, that could provide more room
for acceleration.

THE STEP-UP

Under current law, the estate of someone who dies with assets held outside
retirement accounts—such as a home, stocks or a business—typically doesn’t
owe tax on their appreciation. When heirs sell these assets, they owe tax only on
growth after the original owner’s death. This valuable resetting of the cost basis,
which is the starting point for measuring capital gains, is called the “step-up.”
(See also the section on Estate and Gift Tax.)

In most states, jointly held assets such as a home or investment account receive
a 50% step-up after one partner dies. So if a couple bought a house for $200,000
that is worth $1.1 million when the first spouse dies, the home’s cost basis rises
from $200,000 to $650,000—$100,000 for the survivor’s original cost plus
$550,000 of step-up for the decedent.

In nine states with community property laws, the step-up on jointly owned assets
resets the basis to 100% of fair market value after the first spouse’s death.

Surviving spouses will want to take the step-up into account when selling assets
because a lower gain typically brings a lower tax bill.

THE HOME-SELLERS’ EXEMPTION

Survivors who plan to sell their home should watch the calendar. Married joint
filers get to skip tax on up to $500,000 of appreciation when they sell their home,
and widows and widowers also get the $500,000 break if they haven’t remarried
and sell within two years of the partner’s date of death.

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For Widows and Widowers

If they sell later, the exemption often drops to $250,000, the amount for
single filers.

RETIREMENT ACCOUNTS

Surviving spouses can roll over inherited retirement accounts such as 401(k)s and
IRAs into their own names, and financial advisers routinely recommend this move.

But it may not always be smart. For example, if the survivor is under age 59 ½ and
will need to draw on an account, then rolling it over could bring a 10% penalty on
payouts. While there is no deadline for doing a spousal rollover, often there is no
reversing one once it is made.

New widows and widowers should consider their options carefully. It is possible to
divide retirement accounts such as IRAs and then roll over some but not all assets
into the survivor’s name. This would leave the remainder in an inherited IRA
available for penalty-free payouts to a surviving spouse.

Heirs of these accounts who will face higher taxes as single filers may also want
to convert assets to Roth IRAs, which can have tax-free withdrawals—especially if
they can convert while eligible for joint-filing rates and brackets.

WITHHOLDING AND ESTIMATED TAXES

In general, filers must send the IRS 90% of their total tax for the year by Dec. 31
or soon after, and often this amount is divided unequally between spouses. If the
partner who died paid most of the withholding or estimated taxes, the survivor
may need to make changes or risk underpayment penalties at tax time—especially
if the spouse’s death was early in the year.

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The ‘Kiddie Tax’
This provision can raise the tax rate on children’s unearned income

The “Kiddie Tax” is a levy on a child’s unearned income above $2,200 for
2021 and $2,300 for 2022. Above the exemption, that income is taxed at the
parents’ rate.

This tax typically applies to investment income such as dividends, interest, and
capital gains, although it can also apply to taxable financial aid for education and
certain other payouts, such as a taxable survivor’s benefit. It doesn’t apply to a
young person’s earned income, such as from mowing lawns or designing websites.

Congress passed the Kiddie Tax in 1986 to prevent wealthy or affluent people from
taking advantage of their children’s lower tax rates by shifting income-producing
assets to them. Today, the tax applies to nearly all children under 18 and many who
are under 24, if they are full-time students and aren’t self-supporting.

The 2017 tax overhaul simplified the Kiddie Tax by making a youngster’s unearned
taxable income subject to trust tax rates rather than the parents’ income-tax rate.
But the unanticipated result of the change was that, while the tax was often lower
or the same for children of high-income parents, it often rose sharply for children
of parents in lower tax brackets.

In 2019, Congress restored prior law for 2020 and beyond—a fact that generous
parents, grandparents and others should be aware of.

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Alternative Minimum Tax
This levy affects far fewer taxpayers than it once did, although prior rules
are set to return in 2026

“The alternative minimum tax, or AMT, applied to

170,000 filers for 2019 vs. five million for 2017.”

Congress’s changes to the tax law in 2017 greatly lessened the impact of the
alternative minimum tax, or AMT, a parallel tax system that is complex and
often seems arbitrary. However, these changes are scheduled to expire at the
end of 2025.

The purpose of the AMT is to limit tax breaks allowed by the regular tax system
and ensure that higher earners can’t legally avoid all taxes. The 2017 tax-
changes reduced or repealed several key AMT triggers, such as state and local
tax deductions, personal exemptions and miscellaneous deductions. The AMT
exemption was also expanded as part of the 2017 changes.

As a result, the AMT now applies to far fewer taxpayers than it once did—170,000
filers for 2019 vs. five million filers for 2017 before the law change, according to the
latest IRS data.

Tax specialists say the breaks triggering the AMT now are likely to be more
unusual items such as incentive stock options, interest from certain municipal
bonds and net operating losses.

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Alimony
Alimony is losing favor with divorcing couples

In 2017, Congress made a major, permanent change to the tax status of alimony
payments. As a result, payers can’t deduct alimony on their federal tax returns for
divorce and separation agreements signed after 2018.

At the same time, alimony recipients no longer have to report these payments as
income, making the tax treatment of them similar to that of child support.

Deductions are still allowed for alimony paid as a result of agreements signed in
2018 and before, and such payments will still be taxable to the recipients.

Before the law changed, alimony—also called maintenance—was often used

when one spouse of a divorcing couple earned far more than the other. Alimony
was deductible at the payer’s higher rate, and taxed at the recipient’s lower
rate, creating what was known as the “IRS divorce subsidy.” Payments typically
continued for a period of years and helped defray the expenses of splitting one
household into two.

Elena Karabatos, a divorce attorney with Schlissel Ostrow Karabatos, says that
in many cases the 2017 changes to the tax treatment of alimony can result in
reduced cash-flow for both spouses and lead to lower alimony payments to the
lower-earning spouse.

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 Section 4
For First-Time Taxpayers

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For First-Time Taxpayers

If you’re filing for the first time this year, congratulations! You’ve arrived. Welcome
to the strange, confusing world of U.S. income taxes.

You’re joining more than 200 million Americans each year who gather forms,
face complex calculations, and file an income-tax return with the Internal Revenue
Service by the April due date, which is April 18 for most taxpayers this year.

You’ll likely be filing income taxes for a long time, so here are answers to
basic questions.

HOW MUCH MONEY CAN I EARN BEFORE I OWE FEDERAL

TIP
INCOME TAXES? Use the IRS
calculator to adjust
The short answer is $12,550 for 2021 and $12,950 for 2022.
your withholdings.
That is the “standard deduction” for most single people for these
years. For most married couples it doubles to $25,100 for 2021 and
$25,900 for 2022.

With taxes, a deduction is something everyone wants. Deductions are amounts

subtracted from income the government taxes you on, so having them lowers your
tax bill.

People can either list key deductions for items such as state taxes or charitable
donations on a special form known as Schedule A or they can skip that process
and choose the standard deduction. This year about 90% of filers will opt for the
standard deduction because it will save them more.

Often the tax threshold is higher than the standard deduction, however. People
paying student-loan interest get a special deduction of up to $2,500 for such
interest per return. So a single person taking it for 2021 could earn up to $15,050
before owing tax.

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For First-Time Taxpayers

Workers who contribute to retirement accounts like a traditional IRA or 401(k) can
raise their nontaxable amount by $6,000 or more. Taxpayers can also qualify for
credits that reduce their actual taxes rather than just their income.

WHAT ARE THE RATES ON TAXABLE INCOME?

For now they range from a low of 10% to a high of 37%. (See Income-Tax Rates and
Brackets section.) The rates phase in as income rises, so 10% applies to the first
slice of income, 12% applies to the second slice, 22% applies to the third slice, and so
on. State or local income taxes are on top of that.

OK, SO WHY DID THE COMPANY THAT PAID ME A PITTANCE FOR

AN INTERNSHIP TAKE OUT SO MUCH FOR TAXES? TIP
Scholarships that are
The answer is withholding—and it has nothing to do with emotional used to pay for tuition,
style. The U.S. tax system is pay-as-you-earn. Employers usually fees and textbooks are
must send part of each worker’s paycheck to the government so the usually tax-free.
workers don’t have to cope with a big bill at tax time. These payments
are called withholding.

To be safe, your employer may have withheld more income taxes than you’ll
actually owe. In that case, you get this extra bit back by filing a tax return and
claiming a refund.

Meanwhile, you may be able to adjust your withholding and get higher take-home
pay by filling out an IRS Form W-4 and giving it to the business. There is a useful
IRS calculator for this.

But beware of withholding too little. The law requires most filers to pay 90% of
the income tax they owe before year-end or soon after, or face penalties.

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Also, check your pay stub. Maybe the withholding is mostly for Social Security and
Medicare taxes, not income taxes.

WHY ARE MY SOCIAL SECURITY AND MEDICARE TAXES SO HIGH?

Lower earners often owe more for these social-insurance taxes than for income
tax, because they can kick in on the first dollar of pay.

For example, the Social Security and Medicare tax on the first $12,550 of pay for a
single employee in 2021 comes to $960, while the federal income tax on it can be
$0 due to the standard deduction.

The Social Security tax is a flat 6.2% per employee, plus 6.2% paid by the employer,
on the first $142,800 of wages for 2021 and $147,000 for 2022. Employees don’t
see the employer’s share on their pay stub. The Medicare tax is 1.45% each for the
employer and the employee, and it applies to all pay.

Higher earners also owe a Medicare-tax surcharge of 0.9% on earned income such
as wages above $200,000 for most single filers and $250,000 for most married
joint filers—amounts that aren’t indexed for inflation.

People who are self-employed, such as gig workers and business owners, can owe
even more in these taxes. More on this below.

HOW ARE EDUCATION SCHOLARSHIPS AND STIPENDS TAXED?

Scholarships that are used to pay for tuition, fees and textbooks are usually tax-
free if the student is pursuing a degree or certificate. Tuition waivers for graduate
student teaching and research are often tax-free as well.

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HOW DO I FILE MY TAXES IF I DON’T HAVE A PERMANENT ADDRESS, OR IF I

LIVED IN SEVERAL STATES IN THE PAST YEAR?

The IRS communicates with people by mail, so it needs a mailing address for each
filer. If you don’t have someone you trust to accept mail, consider a post office box.

Note that refund checks can be deposited directly to financial

accounts. They don’t have to be sent to the address on the tax return.
Workers who lived in more than one state during the year should check TIP
with each state to see if they need to file state returns there. Gig workers owe higher
Social Security and
I’M A GIG-ECONOMY WORKER. ARE MY TAXES DIFFERENT? Medicare taxes because
they owe both the
So different! This is a vast topic discussed in the section for business
employer and employee
owners, but here’s a quick outline.
portion of these taxes,
If you’re paid for work, but you aren’t a business’s employee, although they get a
deduction for part of it.
then you’re “self-employed.” Businesses that hire you likely won’t
withhold taxes from your pay, even if they pay you regularly. You’ll be
responsible for paying estimated taxes quarterly, but you’ll also likely
be able to deduct business expenses that employees can’t.

And you will likely owe higher Social Security and Medicare taxes because gig
workers owe both the employee and the employer portion of these taxes, although
they get a deduction for part of it.

Advice for gig workers: Take your taxes seriously now, not later. The penalties for
getting them wrong can be severe, and the IRS can be relentless. Consider asking
a tax professional to outline the obligations, traps and benefits you’re facing, even
if you do your own taxes. Always, always keep good records.

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WHAT’S THE CHEAPEST WAY TO DO MY TAXES?

Get ready to do research.

In theory, more than 100 million filers earning below $73,000 for 2021 have access
to free online tax prep provided by commercial firms through an IRS program
known as Free File.

You can find that program here.

Yet less than 5% of eligible taxpayers use Free File to prepare their returns, leading
to charges that some firms made it difficult on purpose. Changes were made so
Free File would be less confusing, but both H&R Block and Intuit, the maker of
TurboTax, have since withdrawn from the Free File program.

If you want to use Free File, be sure to go through the IRS’s website rather than
individual providers’ sites. Many states also offer free state tax-prep online, and
some are linked to IRS Free File.

If you use commercial software, it may also be free. If it isn’t, consider paying the
fee yourself rather than having it subtracted from your refund, as the fee for this
convenience can be high. While the IRS still accepts returns on paper, it has a large
backlog of them due to the pandemic. E-filing is almost always the fastest way to
get a refund.

Also research the cost of preparing and e-filing your state taxes. Commercial tax-
prep firms often charge for this, but many states have ways to e-file for free.

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 Section 5
For Business Owners

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For Business Owners

For most U.S. business owners, the political fighting over the corporate tax rate
and taxation of foreign income is irrelevant. That is because most U.S. businesses
are organized as so-called pass-through entities for tax purposes. This means
the businesses’ income and expenses pass through to the owners’ individual tax
returns, and any income taxes are paid at individual tax rates.

So everything that affects individual taxpayers also affects the owners of S

corporations, partnerships, limited liability companies and sole proprietorships.

The definition of business owner can also be quite broad. Gig workers and others
who are independent contractors are technically treated as business owners
under the tax system. That comes with additional tax obligations because they
must pay their own payroll taxes through the self-employment tax system. Many
business owners can deduct a variety of expenses that employees can’t deduct
on their individual returns, as long as they keep careful records. These business
deductions can include costs related to driving, maintaining a home office, tax-
preparation fees and business meals. In more than 20 states, many pass-through
businesses can use special taxes to help avoid the federal $10,000 limit on
deductions for state and local taxes.

PASS-THROUGH DEDUCTION

For many of these business owners, the most important

tax-code feature is the special deduction for pass-through TODAY’S SPECIAL
businesses. Congress created this 20% deduction in 2017 as part For many of these business
owners, the most important
of the tax cuts pushed by then-President Donald Trump, and it
tax-code feature is the special
was designed to give them an effective tax-rate cut just like the deduction for pass-through
one corporations received. Like other pieces of that law, the businesses.
deduction is scheduled to expire after 2025 and is under attack
from Democrats.

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In 2021, for individuals with taxable income up to $164,900 and married couples
with taxable income up to $329,800, the pass-through deduction is unlimited,
regardless of industry, employees and assets. Those numbers move up to
$170,050 and $340,100 for tax year 2022.

Above those thresholds, there are limits. Specified service businesses—including

medical practices and accounting firms—start losing the deduction. For others,
the deduction is limited by a formula that takes into account wages paid and
tangible assets.

For more information, see IRS Publication 535.

EMPLOYEE RETENTION CREDIT

The coronavirus pandemic prompted Congress to make a

series of changes to business taxation, some of which are still RETENTION CREDIT
lingering into 2022. Other potential changes—particularly for Businesses with 500 or fewer
multinational corporations—are potentially on the horizon. workers in 2021 can generally get
the employee-retention credit to
Many smaller businesses are affected by Congress’s decision cover their workers; that threshold
to repeal the employee retention tax credit that was created was 100 for 2020.
during the pandemic. The credit operated as a wage subsidy.
In 2021, businesses could receive up to 70% of wages paid, up
to $7,000 per employee per quarter.

For 2021, businesses were eligible if they had a revenue decline of at least 20%,
which was more generous and lenient than the 2020 version of the credit.
Businesses could also become eligible if they were subject to government
restrictions or closures.

Businesses with 500 or fewer workers in 2021 can generally get the credit to
cover their workers; that threshold was 100 for 2020. Above those levels, larger

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businesses are limited in that they can generally get the credit only if they are
paying people not to work.

But Congress repealed the credit effective after Sept. 30 for almost all businesses
as part of the infrastructure legislation that became law in November. The IRS has
set up a procedure for business owners who may have gotten advance payments
of that credit for periods after it expired.

EATING OUT FOR WORK

Another pandemic-era provision continues through 2022. Businesses can fully

deduct the cost of restaurant meals, rather than facing a 50% limit that had
applied before. Mr. Trump pushed for that idea to aid the struggling restaurant
industry. The deduction applies to delivery and carryout meals as well as to those
consumed in restaurants.

Businesses that took advantage of a third pandemic-era break need to begin

repaying it. Congress let employers delay paying their share of payroll taxes during
2020, and pay it back in two installments at the end of 2021 and 2022. The idea
was to help businesses with their cash flow. The first payment was due in late
2021 or early 2022 and the second payment is due at the end of 2022. This was
separate from an optional payroll tax deferral for employees during 2020.

DIGITAL PAYMENTS

Another tax change going into effect in 2022 will affect NEW REPORTING
businesses that receive payments through platforms such Another tax change going
as PayPal and Venmo. Those services will begin sending into effect in 2022 will affect
businesses that receive
information returns to users and to the IRS when transactions
payments through platforms
for goods and services exceed $600 in a year. The plan,
such as PayPal and Venmo.

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enacted by Congress in 2021, is aimed at people who conduct business using

those payment systems, not at people who get reimbursements from friends
and relatives. Those information returns will give the IRS more data about their
business activities so the agency can encourage compliance and more effectively
target enforcement resources.

Before that change, the information returns were sent only when a particular
user had more than $20,000 and 200 transactions. This requirement will apply to
transactions starting in 2022, not to returns being filed early this year. It doesn’t
change the rules about whether such transactions amount to income, and that can
vary depending on the individual circumstances.

INTEREST COSTS AND CAPITAL EQUIPMENT

Changes from the 2017 tax law are still roiling businesses as the rules change.
Starting in 2022, many businesses will be required to amortize their research
costs rather than deduct them immediately. Members of both parties favor
repealing or delaying that change, but they haven’t been able to do so. That could
still happen retroactively, which would wipe out the changes.

At the end of 2022, two other changes are slated to take effect. Large companies
will face even tighter limits on deducting their interest costs under a new formula.

And a provision of the 2017 tax law that allowed 100% deductions for companies
that purchase capital equipment will start phasing down. After this year, the
benefit starts declining so that there is a first-year deduction worth 80% in 2023,
60% in 2024, 40% in 2025 and 20% in 2026. Congress may revisit that structure,
but as currently set up, businesses have an incentive to put new equipment in
service during 2022. Smaller businesses have a similar—but permanent—provision
for immediate write-offs.

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 Epilogue
President Biden and
The Democrats’ Tax
Agenda…Where It Stands

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President Biden and the Democrats’
Tax Agenda…Where It Stands

Democrats control Congress and the White House for the first time in more than
a decade, but so far, they haven’t been able to turn the bulk of their big-picture tax
agenda into law.

Crucial features of the tax code—including the state-and local-tax deduction, the
child tax credit and tax rates on high-income households—remain in limbo after
the Democrats’ Build Back Better legislation foundered in late 2021. For now, the
major contours of U.S. tax policy are the ones that Republicans set in the 2017 tax
law. And if Democrats lose control of one or both houses in midterm elections this
fall before they can get a major tax bill through Congress, the agenda will be put on
hold for the foreseeable future.

Most Democrats have a clear sense of how they want to reshape the tax code
permanently, beyond the temporary expansions of the child tax credit and other
changes that were in place for 2021. Generally, they want to raise taxes on high-
income people and use tax credits to provide income support for lower-income
and middle-income families. The higher revenue would also pay for programs,
including expanded healthcare coverage, prekindergarten classes and climate-
change initiatives.

But with the Senate split 50-50, the details have tripped them up. Sen. Joe
Manchin (D., W.Va.) has objected to the expanded child tax credit and Sen.
Kyrsten Sinema (D., Ariz.) has rejected marginal tax-rate increases.

CHILD TAX CREDIT

At the moment, the child tax credit is the biggest open question affecting the
most taxpayers. Democrats temporarily expanded the credit in 2021 in several
key ways. They increased the maximum size of the credit to $3,000 from $2,000

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for many households, made it fully available to families with little or no income
and added a $600 bonus for children under 6. The IRS also began delivering the
payment monthly last July.

But those payments stopped after December 2021.

Most Democrats now want to revive that break and expand it through at least
2022, calling it a huge stride in fighting child poverty. Mr. Manchin has resisted,
citing his concerns about the lack of an earned-income requirement. For now, the
old credit is back in place. President Biden has said it seems likely Democrats won’t
be able to extend the expanded credit as they attempt to reshape the party’s so-
called Build Back Better legislation.

“The state and local tax deduction (SALT) is a source

of tension within the Democratic Party, and lawmakers
haven’t settled on a decision there.”

SALT DEDUCTION

The state and local deduction is a source of tension within the Democratic Party
and lawmakers haven’t settled on a decision there either.

Democrats won control of the House in 2018 on the strength of suburban voters
in New York and New Jersey who were frustrated by the Republican tax law that
capped the state and local tax deduction at $10,000.

They promised to reverse that move, but progressives such as Sen. Bernie
Sanders (I., Vt.) counter that the benefits of repealing the cap are tilted too much
toward high-income households that pay significant state income taxes.

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The version of the Build Back Better bill that passed the House in November 2021
would raise the $10,000 cap to $80,000, effective for tax year 2021. Senators
sought to lower that cap or set an income limit on the benefit, and they haven’t
settled on what to do. Some House members insist they won’t accept any piece of
the Biden economic agenda if the deduction cap isn’t changed.

HIGH-INCOME HOUSEHOLDS

There is also uncertainty about what to do for high-income households, and the
key benefits of the 2017 Republican tax law remain in place.

President Biden campaigned on raising the top marginal tax rate on individuals to
39.6% from 37%, imposing taxes on unrealized capital gains at death and raising
top tax rates on capital gains and dividends. Senate Finance Committee Chairman
Ron Wyden (D., Ore.) proposed taxing billionaires’ annual gains in wealth as
income. But those proposals haven’t advanced either.

Ms. Sinema stopped the rate increase, and a coalition of Democrats from rural
states blocked the capital-gains change. The billionaires’ tax didn’t get enough
support to advance either.

In their place, Democrats advanced a surtax on adjusted gross income that would
be 5% above $10 million and another 3% above $25 million.

Democrats are pursuing several other tax increases that would affect high-income
households. They would broaden a 3.8% tax on investment income so that it would
apply to the active income of business owners making more than $400,000.

Other plans to tax high-income households have fallen out of the proposals
as they have advanced. Democrats had considered including lower per-person
exemptions from the estate tax and tighter limits on a 20% deduction for business
owners who pay taxes through their individual returns.

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President Biden and the Democrats’
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CLIMATE CHANGE

Individuals may also get tax incentives as part of the Democrats’ efforts to
address climate change. Lawmakers are considering larger tax credits for the
purchase of electric vehicles with bonuses for vehicles manufactured in the U.S. by
unionized workers.

They would also extend and expand tax breaks for people who spend money on
energy efficient improvements to their homes.

THE SMALL STUFF

And any time Congress considers major tax changes, smaller ones often
ride along.

Those could include tax increases like: changes to limit the tax benefits of selling
and quickly re-buying cryptocurrency; limits on contributions to very large tax-
advantaged retirement accounts; and restrictions on high-income people using
business losses to offset other income.

And they could include tax cuts: a deduction for union dues; a deduction for the
cost of employee uniforms; and expansions of the earned-income tax credit for
low-income workers.

But, for now, the proposals remain just that—proposals.

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