IRS Announces Tax Brackets, Other Inflation Adjustments for 2022

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IRS Announces Tax Brackets, Other Inflation Adjustments for 2022

The IRS released inflation changes for 2022 on November 10, 2021, impacting standard deductions, tax rates, and more. The modifications, which take effect in 2023, are the consequence of greater inflation in 2021. The IRS makes these modifications, which apply to more than 60 tax laws, on a yearly basis to minimize bracket creep, or taxpayers being pushed into higher tax brackets owing to inflation.

The modifications are effective for the 2022 tax year, with returns due in 2023. The IRS published changes for 2021, for taxes filed in 2022, last year. Here’s how the 2022 inflation changes will effect taxpayers.

Key Takeaways

  • The basic tax rates for 2022 have not changed, but the income thresholds (brackets) for each rate have.
  • To minimize bracket creep, standard deductions and roughly 60 other rules have been changed for inflation.
  • For taxpayers with three or more eligible children, the maximum Earned Income Tax Credit for 2022 will be $6,935 compared to $6,728 in tax year 2021.
  • The basic exclusion for decedents dying in 2022 will be $12,060,000, up from $11,700,000 in 2021.
  • For calendar year 2022, the annual gift exclusion will be $16,000, up from $15,000 in 2021.

Standard Deduction

The standard deduction, which is used by the overwhelming majority of taxpayers, will rise by $800 for married couples filing jointly, from $25,100 to $25,900 in 2022. The standard deduction for single taxpayers and married persons filing separately will increase by $400, from $12,550 to $12,950. The standard deduction for heads of households will be $19,400 in tax year 2022, $600 more than this year.

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The increased standard deduction amount for anybody 65 or older—or blind—will be $1,400 beginning in 2022. In 2021, the sum is $1,350. You receive two of those extra deductions if you are both 65 and blind.

The deduction for a person who may be claimed as a dependant by another taxpayer is restricted to the greater of $1,150 or $400 plus the individual’s earned income (but not more than the standard deduction of $12,950 for 2022).

Tax Rates Not Changed, But Brackets Increase

The marginal tax rates for 2022 will remain same, but the amount of taxable income that applies to each rate will rise. Income exceeding $539,900 for individuals and heads of household, and $647,850 for married couples filing jointly, will be subject to a 37% tax rate. The table below contains the complete set of tax rates and brackets for 2022.

RateMarried Filing Jointly, Surviving SpouseMarried Filing SeparatelySingleHead of Household
37%Over $647,850Over $323,925Over $539,900Over $539,900
35%Over $431,900 to $647,850Over $215,950 to $323,925Over $215,950 to $539,900Over $215,950 to $539,900
32%Over $340,100 to $431,900Over $170,050 to $219,950Over $170,050 to $215,950Over $170,050 to $215,950
24%Over $178,150 to $340,100Over $89,075 to $170,050Over $89,075 to $170,050Over $89,050 to $170,050
22%Over $83,550 to $178,150Over $41,775 to $89,075Over $41,775 to $89,075Over $55,900 to $89,050
12%Over $20,550 to $83,550Over $10,275 to $41,775Over $10,275 to $41,775Over $14,650 to $55,900
10%$0 to $20,550$0 to $10,275$0 to $10,275$0 to $14,650

Maximum Long-Term Capital Gains

The capital gains tax rate is lower than the regular income tax rate and is determined by your taxable income and filing status. The highest zero-rate taxable income level for married couples filing jointly and surviving spouses in 2022 will be $83,350. The value is $55,800 for heads of family. It is $41,675 for a married person filing separately or any other individual. For an estate or trust, the maximum zero rate is $2,800.

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$517,200

The amount of taxable income for a married couple filing jointly above which the 20% long-term capital gains tax is levied. Individuals are eligible for $459,750.

The 15% capital gains tax will be applied on adjusted net capital gains of up to $517,200 for joint returns and surviving spouses, $488,500 for head of household, $459,750 for any other individual, and $13,700 for an estate or trust. The capital gains rate is 20% over these thresholds.

RateSingle, Income OverMarried Filing Jointly, Income OverHeads of Household, Income Over
0%$0$0$0
15%$41,675$83,350$55,800
20%$459,750$517,200$488,500

Alternative Minimum Tax

High-income people are required under the Alternative Minimum Tax (AMT) to compute their tax bill twice: once under the regular income tax system and again under the AMT. The taxpayer then pays the greater of the two amounts. The AMT is charged at two different rates: 26% and 28%.

For 2022, the AMT taxable income exemption level for single taxpayers is $75,900 and $118,100 for married couples filing jointly. Individuals filing separately who are married are exempt up to $59,050, while estates and trusts are exempt up to $26,500. Exemptions begin to phase out at 25 cents on the dollar after AMTI hits $539,900 for solo filers and $1,079,800 for married taxpayers filing jointly.

Except for married couples filing separate returns ($103,050), the 28% AMT rate applies to excess AMTI of $206,100 for all taxpayers. The rate is 26% for these quantities.

The AMT exemption limit for a child subject to the “kiddie tax” cannot exceed the child’s earned income + $8,200.

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2022 Earned Income Tax Credit (EITC)

If the filer has no children, the maximum Earned Income Tax Credit (EITC) in 2022 is $560 for single and married filing jointly taxpayers. The maximum credit for a single qualified kid is $3,733, $6,164 for two children, and $6,935 for three or more children.

2022 Child Tax Credit

Unless Congress acts, the Kid Tax Credit will return to $2,000 per qualified child in 2022, with phaseouts beginning at $400,000 for joint filers and $200,000 for single taxpayers. Joint filers get no credit if their income exceeds $440,000. In 2022, the refundable part of the Child Tax Credit will be increased from $1,400 to $1,500 to account for inflation.

Maximum Exclusion for Gifts

For 2022, the first $16,000 in gifts to any individual are tax-free. This is an increase of $1,000 from 2021. Gifts to non-citizen spouses are now worth $164,000, up from $159,000.

What Is Bracket Creep?

Inflation drives income into a higher tax band, causing bracket creep. As a consequence, income taxes rise but buying power remains unchanged.

What’s the Contribution Limit on Cafeteria Plans for 2022?

For taxable years starting in 2022, the cap on voluntary employee pay reductions for contributions to health flexible spending arrangements will be $2,850, an increase of $100 from 2021. If the plan allows for unused funds to be carried over, the maximum carryover amount is $570.

What Is the Standard Deduction for Tax Year 2022?

For tax year 2022, the standard deduction for married couples increases to $25,900. Single filers and married persons filing separately will get a standard deduction of $12,950, while heads of households would see a $600 increase to $19,400.

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