(A version of this article by Col. Curt Sheldon, USAF (Ret), CFP®, EA, originally appeared in the February 2022 issue of Military Officer, a magazine available to all MOAA Premium and Life members. Learn more about the magazine here; learn more about joining MOAA here.)
Most of the time, when we talk about tax law, we have new law and old law. But this year, like last year, is throwing curveballs at us. So as we enter the 2022 tax season we have new law and existing laws to check on. Let’s take a look:
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COVID-19 is, unfortunately, still with us. And legislation passed to combat the pandemic could affect your 2021 tax return.
Recovery rebate credit: First of all, there was another tax credit named the “2021 recovery rebate credit” awarded in 2021. You should have received it last spring. The basic amount is $1,400 per person on the tax return, paid based on your 2020 income but earned on your 2021 income.
The credit is limited based on your 2021 income. If you’re married and file jointly (MFJ), the credit starts phasing out at $150,000 ($75,000 for single, $112,500 for head of household (HoH)) of adjusted gross income (AGI). The phaseout is much steeper than previous COVID credits and is completely phased out at $160,000 for MFJ ($80,000 for single, $120,000 for HoH).
The good news is, if your income in 2021 wouldn’t allow you to claim the recovery rebate credit, you won’t have to pay it back if you received it based on your 2020 income.
There are two things to watch for with this credit. First, if your income went down in 2021 versus 2020, you might get some cash back. Second, if your child or other dependent was on your tax return in 2020 and isn’t in 2021, he or she should receive the credit when filing in 2022.
Child tax credit: This was changed significantly in 2021. First, the amount was increased. The maximum credit for a qualifying child age 6-17 is $3,000, up from $2,000. For children under age 6, the credit is $3,600 per child.
Like the recovery rebate credit, the additional child tax credit amount phases out starting at the amounts listed above. The phaseout is a $50 reduction in the total credit amount for each $1,000 over the limit. This only applies to the additional amount of $1,000/$1,600 per child and the old $2,000 per child limit stays in effect until $400,000 for MFJ and $200,000 for single filers, at which point it starts to phase out.
Congress also added an advanced payment of the child tax credit with the objective of paying out half of the credit in 2021. Payments began in July 2021.
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If you received them, here are some words of warning. If your income increased significantly in 2021, you might need to pay back some or all of the increased credit amount. That could cause a tax bill you’re not used to paying. If you alternate claiming your child with an ex-spouse and 2020 was your year and 2021 isn’t, you’re looking at paying back the entire advanced payment.
Charitable cash contributions: Like in 2020, you can deduct $300 of charitable cash contributions without itemizing. The change this year is that the $300 is per taxpayer, not per return. That means that if you file as a married couple, the deduction is $600.
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Disability compensation: One thing that hasn’t changed is the ability of some retired servicemembers to adjust their retired pay based on retroactively awarded VA disability compensation. Specifically, retired servicemembers who are rated less than 50% disabled can reduce their taxable military pension for the amount of VA off set that should have been taken while the claim was being adjudicated.
Note that doesn’t normally apply if you’re rated 50% disabled or more. It could, however, apply if rated 50% or more disabled and you receive combat-related special compensation. Finally, you can claim this on prior years’ tax returns if your VA claim spanned more than one year. There is a statute of limitations that is typically four years.
State and local taxes: One other rule to keep track of concerns your tax-free income. Many active-duty offi cers are residents of states without an income tax. Retirees seem to end up in those states, too. That means you don’t have any state income tax to deduct.
But if you itemize, you can deduct sales tax. The amount of the sales tax deduction is based on your income plus any sales tax paid on large purchases like a car. You can increase your income for the purpose of this deduction by the amount of any tax-free income you receive. When doing the calculation, you’ll want to include your allowances and VA benefits.
Some things never change, but tax law always will. Keep an eye out for the new and pending laws, but don’t forget the existing ones that can make a difference for current and former servicemembers.
Col. Curt Sheldon, USAF (Ret), CFP®, EA, is a Life Member of MOAA and the president of C.L. Sheldon & Company, LLC, a financial and tax planning firm.