3 Under-the-Radar Planning Tips for 2022 Tax Changes

It now seems highly unlikely that President Biden’s ambitious social spending package will be signed into law, or even considered in Congress, by year-end. That doesn’t mean clients should tune out when it comes to year-end planning for tax changes.

As the end of 2021 approaches, both individual and small business clients should be aware of a number of changes that will be coming for 2022 — even if Congress never votes to enact a new law.  Some of those changes could require immediate action — and ignoring others could result in a surprise tax bill when April rolls around.

Are your clients up to speed on some of these under-the-radar tax changes and potential planning opportunities?

Changes to the Child Tax Credit

The child tax credit was expanded and modified for 2021 so that many clients have been receiving monthly advance payments of their 2021 credit.  Unless the law is changed, all clients have now received their final monthly advance child tax credit payment.

Clients should take the time now to examine their 2021 tax picture and determine whether they received excess advance child tax credit payments.

Typically, clients would wait until they file their income tax returns in April 2022 to claim the credit based on 2021 information.  For 2021, the IRS used the taxpayer’s 2020 information (or, if not available, 2019 information) to determine whether the client qualified to receive advance payments. Clients could update this information for changes via the child tax credit portal.

For 2021, taxpayers with qualifying children were eligible to receive a child tax credit equal to (1) $3,600 for children aged five and under and (2) $3,000 for children between ages five and 17 (as of year-end).  For 2022, the child tax credit returns to a $2,000 lump sum payment claimed on the client’s tax return in April 2023.

Taxpayers with modified adjusted gross income under $75,000 (single filers), $112,500 (heads of household) or $150,000 (joint filers) are eligible for the entire credit in 2021.  For taxpayers with income that exceeds this level, but is less than $200,000 (single) or $400,000 (joint returns), the credit phased out by $50 for each $1,000 above the initial threshold (but not below $2,000 per child).

Taxpayers with MAGI that exceeds $200,000 (single) or $400,000 (joint returns) are subject to a second phaseout that could reduce the tax credit to $0.

Many clients have received advance payments that exceeded the amounts that they were entitled to receive.  All clients will be required to reconcile their advance payments on their 2021 income tax return.

Most clients who received excess payments will be required to repay those amounts in April.  Clients who received the tax credit in 2021 should look for Letter 6419 from the IRS in January 2022.  That letter will provide information about the amounts the taxpayer received in 2021.

Clients who received more than they’re entitled to receive shouldn’t panic.  Lower income clients may qualify for full or partial repayment protection if their income falls below $120,000 (joint returns) or $80,000 (single returns).

Expiring Charitable Giving Benefits

Clients have only a few days left to take advantage of the expanded federal income tax deduction for charitable gifts in 2021.  Clients who are looking for ways to reduce their 2021 tax liability should be advised that 2021 is a prime year to make charitable donations.

Congress lifted the typically applicable 60% AGI limit for cash donations to charity in 2021, so that clients can deduct cash donations up to 100% of their adjusted gross income for 2021 only.  Unless the law is changed by year-end, the 60%-of-AGI limit will be reinstated beginning January 1, 2022.

Another pandemic-related provision allowed clients to take a $300 ($600 for married couples) deduction for charitable donations even if the client takes the standard deduction.  This above-the-line deduction is set to expire at the end of 2021.

Transfer Tax Changes for 2022

Most of the estate tax changes that were proposed earlier in the year have now been stripped from the most recent version of the Build Back Better Act.  However, that doesn’t mean clients should breathe easy and assume that no estate tax changes are coming in 2022.

For many high-net-worth clients, it can be smart to take advantage of the current high exemption amounts—which, even without Congressional action, could simply be allowed to expire after 2025.

The IRS has already released inflation-adjusted changes to the gift tax exclusion so that clients will be able to give $16,000 to a donee tax-free in 2022 without becoming subject to the gift tax ($32,000 per married couple who agrees to split gifts).  Further, the lifetime transfer tax exemption amount will increase from $11.7 million per person in 2021 to $12,060,000 in 2022.

Clients should remember that they can make large gifts now, taking advantage of the expanded exemption amounts, without worrying about a future IRS clawback.  In other words, clients who make large gifts today won’t have to worry about estate taxes if they die when the exemption amount is much lower.

Conclusion

Even without a massive year-end tax bill, clients should pay close attention for changes that are coming in 2022 with or without Congressional action.  For many, the time to implement planning strategies to minimize next year’s tax bill is right now.

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Here’s our previous coverage of child tax credit planning in Advisor’s Journal.

We’ve also posted in-depth analysis of the gift tax in Advisor’s Main Library.

Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.