Tax-filing season is in full swing.
It’s always a complicated time and this year is worse than usual. There are added wrinkles from the pandemic with stimulus payments and expanded child tax credits. The IRS’s backlog means it’s unlikely to answer your phone call or respond to your mail soon.
So let’s take a step back and see how much you know about your taxes. To find out, I’ve come up with a quiz. Don’t worry about flunking: Even if you do, you’ll learn about moves that could lower your tax bill or prevent missteps that raise it.
All these issues, and many others, are discussed in the WSJ Tax Guide 2022, which is now out and available to Wall Street Journal subscribers. The fifth edition of this annual ebook summarizes and updates key provisions of the U.S. individual income tax in plain English—or as near to it as my colleague Richard Rubin and I could get, considering that we’re writing about the tax code.
Here’s the quiz:
Question: What’s the top income-tax rate on wages for 2021 and 2022?
Answer. 37% is currently the top rate on wages, bonuses, and other ordinary income. Unless Congress acts, this rate will return to 39.6% in 2026, when the 2017 tax overhaul’s rates sunset.
The highest top income-tax rates—above 90%—were in effect from World War II to the early 1960s, according to the Tax Foundation, which advocates for lower rates and a simpler tax system. The lowest top rate since 1945 was 28%, which applied from 1988 to 1990 as a result of the 1986 tax overhaul.
Q (True or false): Inflation adjustments have raised the maximum amount workers can contribute to traditional IRAs and Roth IRAs for 2022.
A: False. The maximum contribution to traditional and Roth IRAs is $6,000 for both 2021 and 2022 for workers under age 50. Maximum IRA contributions rise in $1,000 increments, and the accumulated inflation of recent years hasn’t yet lifted the limit to $7,000.
However, inflation adjustments did raise the maximum contribution to 401(k) and similar plans to $20,500 for 2022 from $19,500 for 2021.
Q (True or false): Investors with assets in taxable accounts—rather than tax-favored retirement accounts—can qualify for lower tax rates if they hold an asset for at least a year before selling it.
A: True. The lower rates on long-term capital gains apply to sales of investments held longer than a year. The rate is 0, 15% or 20%, depending on taxable income, plus a 3.8% surtax for higher earners.
Q (True or false): State and local tax deductions (SALT) are now capped at $10,000 per return, so married couples can file separately and get two $10,000 deductions.
A: False. The SALT deduction for married couples filing separately is $5,000 for each spouse’s return. To get two $10,000 deductions, the couple would have to divorce and file as single taxpayers.
Q: Before the 2017 tax overhaul, 33 million tax filers took a mortgage-interest deduction on Schedule A. For 2019, the latest IRS data available, how many returns listed a mortgage-interest deduction?
a) 27 million
b) 21 million
c) 13 million
d) 8 million
A: 13 million. The 2017 tax overhaul nearly doubled the standard deduction—the amount taxpayers deduct if they don’t itemize key write-offs on Schedule A—and it also removed or capped some key deductions. It lowered to $750,000 from $1 million the amount of debt on which interest can be deducted for new mortgages.
Since then, many fewer filers have itemized because they save more with the larger standard deduction, and the number of returns showing mortgage-interest deductions has dropped sharply.
Q (True or false): I have until the mid-April filing deadline in 2022 to make my 2021 charitable contributions, just as I do for 2021 traditional and Roth IRA contributions.
A: False. Under current law, the deadline for making tax-deductible donations for last year was Dec. 31, 2021. Some advocates want to extend the deadline to the April due date, but Congress hasn’t done so.
Q: Unreimbursed medical expenses are deductible to the extent they exceed 7.5% of adjusted gross income. Which of these expenses qualify for the deduction?
a) Contact lenses and cleaner
b) A wig after chemotherapy
d) Nursing-home expenses
e) Medicare Part B and D premiums
f) All of the above
A: All of the above. Although the 7.5% threshold is a high hurdle to receiving a benefit, taxpayers who itemize deductions on Schedule A can deduct a wide variety of unreimbursed expenses ranging from acupuncture to X-rays. For more information, see IRS Publication 502.
Q (True or false): Taxpayers who got direct deposits of 2021 child tax credits last year could have lower refunds or higher taxes due than expected on returns they’re preparing now.
A: True. Millions of taxpayers received partial prepayments of expanded child credits for 2021 last year via direct deposit. As a result, these amounts won’t be available to boost refunds or lower a tax balance due, and many filers could be in for bad surprises when they complete their 2021 returns.
Q (True or false): I underfunded the child-care Flexible Spending Account offered by my company last year because of pandemic uncertainties. But when the day-care center stayed open, I spent thousands of dollars on child care and now I don’t get a tax break.
A: False. Just for 2021, Congress greatly expanded the child- and dependent-care tax credit so it applies to 50% of qualified expenses up to $16,000 for up to two children. Many parents aren’t aware of this expansion.
Q: Key changes made by the 2017 tax overhaul will sunset at the end of 2025. Which one of these 2017 changes is permanent?
a) The doubling of the base child tax credit to $2,000 per child, from $1,000
b) The doubling of the gift- and estate-tax exemption, which for 2022 is $12.06 million per person
c) A switch in the method of inflation-indexing for tax provisions that often produces lower increases
d) Repeal of the deduction for employees’ home offices
A. C: Slower inflation indexing for many tax provisions. With inflation heating up, read more about this switch here. The other provisions expire at the end of 2025, unless Congress acts.
SCORE: U.S. income taxes are confusing and the details change frequently, so you know a lot if you got even one answer right!
This article was written by Laura Saunders and published in The Wall Street Journal on February 25, 2022.
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