Every year, new legislation, changing culture, and other external factors affect how taxes are received and processed by the IRS. It’s going to be no different when you file your taxes in 2022. Here are five of the new tax laws that we think you should be cognizant of before filing!

Inflation Is Measured Differently

As always, things like tax brackets, standard deduction, and eligibility for certain deductions are changing based on inflation rates–but that’s nothing new. What is new is how inflation is being calculated. Instead of using the traditional Consumer Price Index, inflation is now being calculated with a system called chained CPI, which can cause taxpayers to get pushed into a higher marginal tax bracket because of cost-of-living increases or annual raises that outpace the slower chained CPI.

IRA Contribution Deduction Changes

While contributions to IRAs remain the same in 2021, the deductions that you’re able to take for the contributions are changing.

  • For active participants in employer retirement plans, phaseout for making individual retirement account (IRA) contributions will occur at AGIs between $66,000 and $76,000 for single and head of household filers, $105,000 and $125,000 for joint returns
  • For those with IRAs who do not actively participate in another plan but their spouse does, phaseout will now range from $198,000 to $208,000 for those that are married and filing a joint return. For a married individual filing separately, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 to $10,000.

Alternative Minimum Tax Exemption Amount

The Alternative Minimum Tax, or AMT, is a law designed to ensure wealthy taxpayers are paying their fair share and not taking advantage of the multiple loopholes and deductions offered to them.

In order to avoid middle-income taxpayers being affected too strongly by the AMT, it keeps pace with inflation every year. The exemption amount for the AMT started at an Adjusted Gross Income of $72,900 in 2020, and for 2021 it will be $73,600 for single filers. It begins to phase out at $530,600 in 2021 compared to $518,400 last year. For married couples, the exemption now begins at $114,600 and phaseout begins at $1,047,200.

Consolidated Appropriations Act of 2021

The Consolidated Appropriations Act was passed into law at the end of 2020, and will affect how taxpayers file their taxes for 2021.

For starters, every single filer whose AGI comes in at under $75,000 will receive an advance tax credit of $600, plus an additional $600 for every qualifying child. The threshold rises to $150,000 for joint filers.

Additionally, businesses are given an extension of the ability to deduct 100% of certain meal expenses, and teachers are given the option of deducting personal protective equipment under the $250 qualified educator tax deduction.

Congress also clarified that business owners with expenses paid by forgiven PPP loans are fully deductible, and are not part of your gross income.

Expiration of CARES Act Provisions

The CARES Act had a long list of provisions that were meant to provide short-term relief in the height of the pandemic in 2020, and many of those provisions that some may have used last year to file taxes are now expired and should not be counted on.

However, there are some provisions that were extended through the end of 2021, such as allowing employees to avoid being taxed on student loan payments made by their employer. Others were extended even longer, such as the Family and Medical Leave Act, which now extends through 2025 and provides incentives and subsidies for employers that offer leave.

Contact our tax professionals today to get a full rundown of how to prepare for the 2021 tax season!