With 2022 nearly upon us, it will soon be time to file our Minnesota and federal tax returns. As we enter our third tax year that intersects with COVID-19, we’ll cover some of your burning questions about your 2022 taxes and what you’re in for.
Will inflation raise my taxes?
That’s a question on the minds of many. Because if the Internal Revenue Service did not adjust tax brackets and exemptions for inflation, yes, you would be paying more at tax time. This is known as “bracket creep,” and here’s what happens in a nutshell.
- You get a modest cost-of-living pay raise.
- The higher income bumps you into a higher tax bracket.
- A double whammy arrives at tax time: Higher taxes and earnings that don’t go as far. Ouch!
Luckily, the IRS takes steps to prevent bracket creep, so our taxes don’t run away with inflation. Each year, the IRS adjusts the income thresholds for federal tax brackets according to the consumer price index. As we know, 2021 saw higher than average annual inflation, at 6.8% as of November.
Additionally, the IRS has also increased the amount of the standard deduction. (Because, again, if that isn’t adjusted, then the deduction would become less effective at managing our costs.)
This doesn't address all areas of taxation, and the outcome of your tax bill will depend on many individual factors. Bottom line, if your tax bill does end up being normal in 2022, you can take small comfort in the fact that it would be higher without these inflation control measures.
Will inflation affect Minnesota taxes?
It’s worth pointing out that several state governments don’t have a system to prevent bracket creep and higher taxes. (This is criticized as a workaround for state governments to raise revenues.) Luckily, Minnesota also spares taxpayers from bracket creep. The Minnesota Department of Revenue indexes the tax bracket according to inflation, and the standard deduction conforms to the federal rate.
If you do end up with a tax refund in 2022, it will be hard to forget that those specific dollars won’t go as far as they did two years ago. But it’s good to know there’s at least some mechanism to keep inflation from taking more of your hard-earned money.
Is the enhanced child tax credit coming back in 2022?
Here’s a question that’s on the minds of many parents. Without a doubt, the extra payment helped many families cover child care costs and other expenses that accompany raising children.
- The standard child care credit offers a $2,000 tax credit for children ages 17 and under.
- The enhanced CTC bumps that up to $3,600 for children under 6, and $3,000 for each child between the ages of 6-17.
The return of the enhanced and extended CTC in 2022 will depend on the passage of the Build Back Better bill in the U.S. Senate. A vote is expected by the end of 2021.
Will the tax deadline be extended again in 2022?
In the 2020 and 2021 tax seasons, the Internal Revenue Service extended the filing deadline for federal taxes, and the Minnesota Department of Revenue followed suit. So far, there’s no indication that the IRS plans to repeat this extension. But then again, the IRS waited until March 2021 to announce an extension, so who can say?
If finances are tight and you could use more time to catch up, apply for an extension and file it on or before Tax Day, which is Friday, April 15, 2022. Fill out and submit Form 4868, and you’ll then have until October 15, 2022, to file your federal and state taxes.
In Minnesota, you don’t file a separate form requesting an extension on your taxes.
Tax credit vs tax deduction: What’s the difference?
If you’re looking to lower your federal taxes and Minnesota taxes, you'll want to know your options with tax credits and tax deductions. They are not interchangeable. Tax credits make a bigger impact.
What’s a tax deduction?
A tax deduction lowers your taxable income. So if you qualify for a $1,000 tax deduction, it will not deduct $1,000 from your tax bill.
It will deduct $1,000 from your taxable income, however. So if your taxable income is $60,000, for example, your claimed deduction will lower it to $59,000. Lowering your taxable income can save you money on your tax bill.
What's a tax credit?
Tax credits reduce your owed taxes by a specific dollar amount.
However, read the fine print so you’ll know if you have a partial tax credit or a full tax credit coming your way. If you’re factoring that tax credit into a major purchase, such as an electric plug-in vehicle, understanding the difference can help you. Here are key terms to know:
- Non-refundable tax credits: This tax credit doesn’t result in tax refunds. But it does mean you can apply a specified amount to your tax balance. So if you owe $500, but you qualify for a $600 non-refundable tax credit, it would reduce your tax bill to zero — and you won’t get a check from the IRS for the remaining $100.
- Refundable tax credits: This is where you can qualify for a cash refund. To apply the above example, you’d apply $500 to your tax balance, and get $100 from the IRS.
- Partially refundable tax credits: This combines the two — part of the credit is refundable, and the rest would stop at reducing your tax balance.
Knowing the difference between the two can help you plan. Let's say you were planning to apply a tax break for educational expenses. A tax deduction vs a tax credit will make a heck of a difference on your finances. But remember, read the fine print.
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