What are the Most Valuable Tax Credits 2022?
Americans will see a long list of changes to tax laws in 2022. Time to make the most of them.
Tax planning is important every year, but with the damaging economic impact of inflation and the pandemic, it is critical to stay up to date with new rules and tax laws. Here, we’ll take a closer look at what’s recently changed and how you can make the most of tax credits in 2022.
In 2021, temporary measures put in place through the American Rescue Plan Act (ARPA) expired. These measures, including additional tax relief for Americans, were enacted in response to the financial hardship of the pandemic. Until part or all of President Biden’s Build Back Better Act is passed into law, tax rules are closer to their pre-pandemic versions.
As you prepare to file your taxes, you’ll want to know how to optimize your tax load and reduce the amount you owe to the Internal Revenue Service (IRS). So, what do recent changes to tax laws mean for you? What are the most valuable tax credits 2022? Let’s take a closer look.
1. Child Tax Credit
The Child Tax Credit is a staple benefit for U.S. taxpayers. Although it has been through recent changes—reverting to pre-pandemic levels—for many families, it is critical among tax credits 2022.
In 2021, the American Rescue Plan Act increased the Child Tax Credit, creating a welcome tax break for families during the hardship of the pandemic. But, when Congress voted not to continue the ARPA, child tax credits reverted to their original amounts—$2,000 per eligible child.
Thankfully, not all 2021 tax changes were fully reversed. The qualifying age for the Child Tax Credit, for example, remains at age 17 for the 2022 tax year. This represents an increase from pre-ARPA levels when the qualifying age was 16.
There are additional modifications for the 2022 tax year, as well. Child tax credits 2022 are fully refundable, allowing eligible families to receive the credit as cash, even if they don’t owe federal income tax. This will be a huge benefit for families who need the most support.
In addition, the Child Tax Credit for 2022 features lower income limits than those used for the original credit. Families who do not qualify for new limits are still eligible for a $2,000 child tax credit. Thankfully, the refundable portion of the Child Tax Credit will also be adjusted for inflation in 2022—up from $1,400 in 2021 to $1,500.
2. Earned Income Tax Credit
The Earned Income Tax Credit (EITC)is a federal refundable tax credit, designed to help lower-income households in the United States. It reduces taxes owing and can even supplement wages. Like the Child Tax Credit, it can translate into a tax refund.
Like many U.S. tax rules and regulations, the EITC has undergone adjustments over the last few years. In 2021, the ARPA broadened its use, providing more people with financial relief, including expanded eligibility for taxpayers without children or other dependents.
Thankfully, the EITC tax credits 2022 look similar to those for 2021. To qualify for this 2022 tax credit, you must have earned, taxable income below threshold amounts, and total investment income below $10,300.
Given the wide net cast by the EITC, its targeted relief for lower-income households and its refundable status, it is one of the most helpful tax credits 2022.
3. American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is a valuable credit for those pursuing education or helping a child with tuition to a recognized education institution. The AOTC is refundable up to 40%, designed to help families who need the most support.
In 2022, to be eligible for the full AOTC amount, your Modified Adjusted Gross Income (MAGI) must be $80,000 or less (or $160,000, if filing jointly). For those with higher levels of MAGI — between $80,000-$90,000 — you will still qualify for the AOTC at a reduced amount. With a MAGI over $90,000, you will not qualify in the 2022 tax year.
If a student meets income qualifications and a list of program and education-related criteria, you can claim a maximum of $2,500 per year, per eligible student. If taxpayer liability is negative, the AOTC can result in a tax credit of up to $1,100. This translates into welcome support for those who need it most.
The IRS will credit 100 percent of the first $2,000 of education expenses and 25 percent of the next $2,000 for each eligible student. Together, the AOTC offers significant support for families with students in post-secondary education. If you have eligible students in your family, the AOTC may be one of the most useful tax credits 2022.
4. Retirement Contribution Savings Credit
Often called the Saver’s Credit, the Retirement Contribution Savings Credit is a non-refundable credit, designed to encourage working Americans to make contributions to their retirement savings.
One of the tax credits 2022 that performs double-duty, the Retirement Contribution Savings Credit does two primary things — it provides a credit for the current tax year and ultimately increases the amount of savings you’ll have in retirement.
Depending on your adjusted gross income, this credit will provide 10%, 20% or 50% of contributions to:
- a traditional IRA or Roth IRA
- a 401(k), 403(b), governmental 457(b), SIMPLE plan or SARSEP
- a 501 plan (c)(18)(D)
- a qualified retirement plan, including Thrift Savings Plan or 403 (b) plan
- other retirement savings vehicles
With a maximum contribution amount of $2,000 per year and a maximum credit rate of 50%, the maximum tax credit is $1,000. Although the Saver’s Credit is non-refundable and unable to translate into a refund, it can greatly help reduce taxes owing.
5. Lifetime Learning Credit
Another example of education-related tax credits 2022 is the Lifetime Learning Credit (LLC), which is designed to help eligible students with expenses related to learning. While you must meet certain criteria to claim this tax credit, there is no limit on the number of years it can be claimed.
Unlike the AOTC, the LLC is non-refundable, meaning it can reduce your taxes owing but will not produce a refund. This credit is designed to help pay for expenses related to undergraduate, graduate or professional degree courses, as well as courses designed to improve job skills.
The LLC is worth up to $2,000 per tax year. Keep in mind there are important differences between the AOTC and the LLC, including maximum benefit, duration of benefits and many others. A tax professional can help you identify which credits best apply to your situation.
American taxpayers have seen significant changes to tax credits from 2019 to 2022. With inflation creating uncertainty in a post-pandemic economy, it is important to be up to speed with current tax laws and to take advantage of every possible credit.
At Franskoviak Tax Solutions, we have helped our clients with tax planning for more than 30 years. We take pride in handling the details of tax planning, including making the most of tax credits 2022. We provide comprehensive tax services with first-class expertise and a personalized, boutique-style approach.