In The Spring, An Old Man's Thoughts Turn To...
As I write this, Spring’s arrival seems to be just around the corner. So, with apologies to Alfred Lord Tennyson, my current thoughts are on something a bit less romantic: taxes.
As they do most years, our elected staff in Washington DC made changes to tax law meaning your 2022 taxes (due this year) will be somewhat different than last year’s. Tax bills are likely to be larger, or refunds smaller, post the various pandemic-related income and tax stimuli. Here are some of the changes you may encounter.
The child tax credit was increased during the pandemic, with parents of children under 6 receiving $3,600 and parents of children ages 6 to 17 getting $3,000 per child. For this tax year, the credit has returned to its pre-pandemic level of $2,000 per child regardless of age.
Another credit that’s less generous for 2022 is the Earned Income Tax Credit. Low- and moderate-income workers without children were eligible to receive a credit of up to $1,500 in 2021. This year, the EITC reverts to a lower amount - $560.
Since 2017, an increased standard deduction has meant that the majority of taxpayers no longer benefit from itemizing. For 2022’s taxes, this deduction is increased to $13,850 for single filers ($27,700 for a married couple). Such indexing tends to reduce taxes but the Covid-related CARES Act included a provision allowing single taxpayers to deduct an extra $300 ($600 for married couples) in charitable gifts from their 2020 and 2021 incomes. This charitable deduction (similar to that allowed for retirement contributions) wasn't renewed, which means that taxpayers who don't itemize are no longer allowed this extra deduction for such gifts in 2022.
Currently, those earning under $100,000 per year face less than a half-percent chance of being audited. However, audits overall may increase as additional funding for the IRS from last December’s SECURE Act has allowed the agency to begin hiring more staff. Incidentally, those of you living in the Metaverse have approximately a zero chance of being audited by Oscar-winner Jamie Lee Curtis.
Speaking of things that may or may not be real, the IRS expects people to pay taxes on gains in their cryptocurrency assets. The Securities and Exchange Commission has yet to formally regulate these virtual currencies but, based on what’s known as the Howrey Test, the SEC generally considers these currencies to be securities, meaning that they must be treated like your stock, bond and real estate investments, i.e. gains must be reported on your 1040. This is an area which is very likely to see more, not less, enforcement activity in the future.
Tax season always raises questions about who pays how much. Here are the answers courtesy of the IRS itself: the top one percent of earners took home about 22% of all earnings and paid about 44% of all income taxes. The top five percent took home about 38% of earnings and paid about 63% of all income taxes. The bottom fifty percent earned about 10% of all income and paid about 2% of all income taxes.
No client has ever told me she or he was happy to pay income taxes or was in complete agreement with how the revenue was spent. However, we all understand they’re necessary to fund our country’s various needs and wants. For the fiscal year 2021, the IRS collected more than $4.1 trillion ($4,100,000,000,000) to do just that. At some point, I’m sure most of us have asked, “Where do all those tax dollars go?” Here’s the answer, courtesy of the IRS itself:
This chart comes from the IRS’s 2021 Data Book. For those of you who’d like to see the spending details presented at a more granular level, here’s a link to the National Priorities Project. This page allows you to enter your tax payment and see where your money went in much greater detail. This exercise may not change many minds about how our money is spent but I think it might be worth the minute or so it takes to become accurately informed.
Taxes are, of course, the cost of living in the greatest country in the world. We want our clients to pay their fair share but never one penny more so minimizing taxes is always a goal of our practice. WWA spends significant time and money every year studying rule changes to remain current and achieve that goal.