Facts about Tax credits and Tax deductions that can help for Tax Preparation

Starting a small business can be exciting but it can also be overwhelming. Making the right decisions is key to your business’s success, and one of those decisions is hiring an accountant.

Tax season is here, and it’s time to get up to speed on all the changes that occurred in 2022. With all the tax laws changing yearly, tracking what credits and deductions are available can be challenging. But don’t worry; we’ve got you covered! In this blog post, we’ll break down the latest tax credits and deductions you should use when preparing your taxes this year to ensure you’re paying the right amount.

Tax credit vs. Tax deduction: what's the difference?

Before we dive in, it’s essential to understand the difference between tax credits and tax deductions. Tax credits are typically more favorable since they reduce your tax liability dollar for dollar. Deductions, on the other hand, are amounts that are subtracted from your income so that less of it is eventually taxed.

Individual Tax Credits for 2022:

The Child Tax Credit (CTC) has been reduced to match pre-pandemic amounts. Effective for 2022, the Child Tax Credit is $2,000 per  qualifying  child,  of  which  $1,500  is  refundable. Refundable credits are those paid to the taxpayer regardless of their tax liability. A qualifying child  is  a  de-pendent  child  who  has  not  yet  attained  the  age  of  17  as  of  the  close of the calendar year. The credit begins to phase-out when AGI exceeds $400,000 for a MFJ return and $200,000 for all others.

Dependent Care Credit and Exclusion: Effective for 2022, the dependent care expense limitation is $3,000 for one child and $6,000 for two or more children. The credit is not a refundable credit, meaning that the credit is limited by the amount of tax a person owes. The credit equals a percentage of dependent care expenses but is not less than 20% for taxpayers with AGI over $43,000. Under the dependent care assistance program, employees can exclude up to $5,000 ($2,500 MFS) of employer benefits used to pay for the same expenses that generally would otherwise qualify for the dependent care expense credit.

Homeowner Credits – you can deduct the interest and insurance premiums you pay if you own a home. To do so, you must file a 1040 return. In addition, you may qualify for some residential energy credits if you made some energy-saving changes to your home.

Electrical Vehicle Credits – if you purchased an electric vehicle in 2022, you might be eligible for a tax credit of up to $7,500. Please note that you can’t get back more than you owe in taxes. To qualify, you must buy the vehicle for your own use, not for resale and it must be used primarily in the U.S. The car must have an external charging source, have a gross vehicle weight rating of fewer than 14,000 pounds, and be made by a manufacturer that hasn’t sold more than 200,000 EVs in the US.

Electric Vehicles at a charging station

Individual Tax Deductions for 2022:

Charitable Contributions: In the last two tax years, taxpayers who elected the standard deduction were able to deduct up to $600 without itemizing deductions. For the 2022 tax year, taxpayers must itemize to deduct charitable contributions.

Work-related expenses: With the recent changes to how we work, more and more people have multiple sources of income. Depending on how you are paid, you may be able to use a business schedule to deduct things like business use of your home. Also of note is the large increase in the standard mileage rate, which changed mid-year. Miles driven after July 1 are worth more of a deduction than those in the first half of the year.

Homeowner Credits – you can deduct the interest and insurance premiums you pay if you own a home. To do so, you must file a 1040 return. In addition, you may qualify for some residential energy credits if you made some energy-saving changes to your home.

In conclusion, understanding the different types of credits and deductions and which ones apply to you is the key to making sure you pay the lowest possible tax liability. As the IRS announces new rates and tax regulations, get in touch with the pros at Positive Rate so that you don’t miss out on valuable credits and deductions.

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