Twelve Income Tax “Need to Knows”

By Barbara O’Neill, Ph.D., CFP®, boneill@njaes.rutgers.edu

Tax forms, a paper with taxes written in all caps, and a calculator
Image: Nataliya Vaitkevich / Pexels

April is the height of “income tax season” and many Personal Financial Managers (PFMs) are busy fielding tax questions from military families. A prior post summarized highlights from the OneOp Personal Finance team’s 2022 income tax update webinar. The webinar focused on filing 2021 tax returns.

Below are twelve additional “nuggets” that PFMs (and their clients) need to know about income taxes:

  1. Advance Child Tax Credit Trade-Offs– Taxpayers who received the six-monthly ACTC payments in 2021 and had an increase in taxable income may receive smaller refunds or a tax bill in April. Taxpayers must use Schedule 8812 to “settle up” their allowable child tax credits based on 2021 income and other variables.
  2. Marginal Tax Brackets– There are currently seven marginal tax brackets ranging from 10% to 37%. Like a layer cake, ranges of taxable income are stacked on top of each other and taxed at different rates.
  3. Capital Gains Taxes– Short-term gains on investments held a year or less (e.g., day trading stocks using cell phone apps) are taxed at ordinary income tax rates noted above. Long-term capital gain rates on investments held for more than a year are taxed at 0%, 15%, or 20% tax rates, based on taxable income.
  4. Inflation Adjustments– Most tax-law numbers, like income ranges for tax brackets and standard deductions, are inflation-adjusted annually. An exception is the income ranges for tax on Social Security.
  5. Standard Deduction– 2022 standard deductions are $12,950 (single filers) and $25,900 (married couples filing jointly), with an additional $1,750 (single)/$1,400 (married) if taxpayers are blind or age 65+.
  6. SALT Cap– About 11% of taxpayers exceed the standard deduction and benefit from itemizing deductions. The maximum deduction for state (income) and local (property) taxes remains at $10,000 through 2025.
  7. Charitable Donations- The $300/$600 deduction for donations to qualified charities by non-itemizing taxpayers was for 2021 only (COVID relief). In 2022, non-itemizers cannot deduct donations. One workaround strategy is to “bunch” donations and other deductible items every few years to be able to itemize.
  8. Tax Withholding– This is done via payroll deductions and quarterly estimated tax payments. Taxpayers are expected to “pay as they go” and remit at least 90% of tax due, which is a key underpayment “safe harbor.”
  9. Tax Withholding Resource– The IRS Tax Withholding Estimator is a helpful tool to determine adequate payroll deductions and estimated payments, particularly for taxpayers with multiple income streams.
  10. Cryptocurrency Question– At least 16% of Americans own crypto. Taxpayers are required to answer a question about this on page 1 of the 1040 tax form. Crypto profits are supposed to be taxed as capital gains.
  11. Student Loan Interest Deduction- Up to $2,500 per tax return (single or married couple filing jointly) can be deducted for student loan interest. Income-related phaseout levels- $70,000(s)/$145,000 (mfj)- apply.
  12. Death of a Spouse– Surviving spouses can file jointly in the year of their deceased spouse’s death. After that, they file individually or as a surviving widow/widower if there are dependent children. A so-called “widow’s penalty” can occur if the change in tax filing status results in a higher marginal tax bracket.

Additional information about income taxes can be found in IRS Publication 17, Your Federal Income Tax.

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