Time is running out for certain tax breaks

Time is running out for certain tax breaks

With the mid-term elections coming to a close with the run-off election for the Georgia Senate seat, Congress turns its attention to some must-pass bills before the end of the year.

First, funding for the federal government expires on December 16, requiring Congress to pass an omnibus spending bill or continuing resolution. Additionally, lawmakers must appropriate funds for defense spending through the National Defense Authorization Act (NDAA). Whether other measures such as a bipartisan retirement bill or action on tax provisions already expired or slated to expire at the end of 2022 get attached to year-end legislation, remains to be seen.

Here are some key tax provisions we’re following:

How will the Child Tax Credit (CTC) impact 2022 tax returns?

Under the American Rescue Plan, the CTC was temporarily expanded to $3,000 per child ($3,600 for children under age six), with the credit being fully refundable. This means that eligible taxpayers could benefit from claiming the tax credit even if they did not report income. This enhanced version of the CTC expired at the end of 2021. Unless Congress acts, taxpayers filing their 2022 return will be limited to a $2,000 tax credit per child, which is only partially refundable.* There have been discussions from lawmakers on both sides of the aisle on a temporary extension but the prospects are unclear.

*The enhanced version of the CTC was available to taxpayers with modified adjusted gross income below $150,000 (married couples filing a joint return) or $75,000 (individuals). The “regular” version of the CTC applies to taxpayers with modified adjusted gross income below $400,000 (married couples filing a joint return) or $200,000 (individuals). Additionally, there is a $500 tax credit available for dependents other than “qualifying children” who are defined as those under age 17. Other dependents may include, for example, older children or other individuals claimed as dependents.

Charitable deduction for non-itemizers

The Coronavirus Aid, Relief, and Economic Security Act (CARES) introduced a $300 deduction for cash contributions in 2020 to a qualified charity regardless of whether the taxpayer itemized deductions on their tax return. For 2021, the deduction was increased to $600 for married couples filing a joint tax return. Because the provision expired at the end of 2021, the deduction is not available to be claimed on 2022 tax returns unless Congress acts. Since roughly 90% of taxpayers claim the standard deduction on their return, this change will impact most people as they file their 2022 return.

Important changes for businesses purchasing equipment

Signed into law in late 2017, the Tax Cuts and Jobs Act (TCJA) enacted a provision (referred to as 100% bonus depreciation) that allows business owners to fully expense the cost of qualified property in the year it was purchased and placed in service. The definition of “qualified property” is fairly broad and may include certain vehicle purchases, heavy machinery, manufacturing equipment, building upgrades, and software. This option provides a benefit over having to utilize a depreciation schedule and expense the cost over a longer number of years for tax purposes. The provision, in its current form allowing 100% expensing, expires at the end of 2022 and will be phased out gradually through 2027 (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027).

There may be an opportunity for business owners to act now to maximize this tax benefit, assuming property can be placed in service by the end of the year. It doesn’t mean that the equipment must actually be used by the end of the year. But the equipment has to be ready and available for use for its designated purpose. Another requirement holds that the property (such as a vehicle) must be used for business purposes at least 50% of the time. The provision applies to purchases of used property as well. For tax purposes, utilizing the 100% bonus depreciation option can result in a tax loss if expenses exceed income. The considerations on expensing property are complex, and differences in state tax law may apply, so it is important for business owners to consult with a qualified tax professional on their options.


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