Five Tax Elections for 2022 Income Tax Season

The mid-term elections don’t take place until November, but taxpayers may make other elections on their 2021 tax returns they must file by April 18. Following are five potential elections that could affect your 2021 tax liability.

1. Itemized deductions: When you file your 2021 tax return (due by April 18, 2022), you can itemize deductions or claim the standard deduction, but you can’t have it both ways. Under the Tax Cuts and Jobs Act (TCJA), the standard deduction has more than doubled, while certain itemized deductions were suspended or scaled back. Therefore, more taxpayers are now claiming the standard deduction.

The standard deduction for 2021 is $12,550 for single filers and $25,100 for joint filers. The election is easy—simply go with the method that produces the bigger deduction.

2. Installment sales: If you sell investment or commercial real estate in installments in at least two tax years, the tax liability is spread out on a pro-rata basis over the years payments are received. In effect, you postpone the tax due on a sale, as well as possibly reducing the overall tax. This installment sale tax treatment is automatic.

However, if it suits your personal needs, you can “elect out” of installment sale reporting and pay the entire tax due in the year of the sale. This might be preferred if 2021 was a low-tax year and/or you expect the next few years to be high-tax years. Or you may have carried over losses than can offset 2021 tax liability

3. Higher education credits: If you have children in college, you may be able to claim one of two higher education tax credits—the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit—subject to phase-outs. The maximum AOTC is $2,5000 per student while the maximum LLC is $2,000 per filer. This generally favors the AOTC.

However, the phase-out levels have been equalized in 2021, so this is no longer a factor. (Previously the levels were higher for the AOTC.) Choose the credit that benefits your family the most.

4. Home office deductions: Typically, a self-employed individual who operates a business from home may qualify for home office deductions. As a result, you can deduct expenses directly attributable to the home office, plus a portion of the indirect expenses for the home reflecting the percentage of business use of the home.

Instead of keeping detailed records, you may use a “simplified method” equal to $5 per square footage of the home office, up to a maximum of $1,500. But the actual expense method usually produces a bigger deduction, so you might bypass this election.

5. Joint vs. separate returns: Generally, a married couple benefits from filing a joint tax return, rather than filing separate returns. But that’s not always the case. For example, filing separately may be preferred if one spouse has a disproportionately large portion of a couple’s deductible medical expenses, factoring in the floor of 7.5% of adjusted gross income (AGI). Another example is when one spouse may benefit from a bigger qualified business income (QBI) deduction.

Consider these elections carefully (especially the last one). This could affect your overall tax situation in a multitude of ways.

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