How does the recent IRS guidance on inflation adjustments and 2022 tax brackets affect you?

On November 10, 2021, the IRS released important new guidance on tax inflation adjustments for the 2022 tax year. This guidance—which includes updated tax brackets, changes that affect standard deductions, and more—applies to 2022 tax returns that will be filed in 2023. 

How do the 2022 IRS inflation adjustments affect taxpayers?

There are several key takeaways from the new 2022 taxpayer guidance:

  • About 60 provisions, including standard deductions, have been adjusted to account for increased inflation.
  • The IRS did not change tax rates, but the tax brackets have been adjusted, so your tax bracket may have changed even if your income has stayed the same. 
  • The maximum Earned Income Tax Credit will go up from $6.728 to $6,935. This credit applies to taxpayers with three or more qualifying children—taxpayers with less than three children will receive a lower Earned Income Tax Credit depending on the number of their dependents. 
  • The annual gift exclusion for 2022 will go up from $15,0000 to $16,000.
  • The Basic Exclusion Amount for taxpayers who die in 2022 will go up from $11,700,000 to $12,060,000.

Note—these are just the biggest changes that will impact the greatest amount of taxpayers, but the new guidance affects over 60 provisions in the tax code. For more information, read on, check out the full details of Revenue Procedure 2021-45, or reach out to one of our advisors for a free consultation to learn how our PRIME tax experts can help you keep more of the money you earn. 

Why does the IRS make inflation adjustments?

The IRS wants to avoid “bracket creep.” To be clear, bracket creep isn’t that weird guy from the office who’s always lurking around asking you to be part of his March Madness pool. From a taxpayer’s perspective—bracket creep is what happens when inflation pushes your income into a higher tax bracket, but you don’t have any increased purchasing power. When prices rise due to inflation, you may get a raise to account for the higher cost of living. But because prices are higher across the board, your higher income doesn’t allow you to buy more goods and services. In this case, you should not be subject to a higher tax rate strictly because of inflation, so the IRS makes inflation adjustments. 

What are the 2022 adjusted tax brackets?

For tax year 2022, the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).

The other rates are:

35%, for incomes over $215,950 ($431,900 for married couples filing jointly);

32% for incomes over $170,050 ($340,100 for married couples filing jointly);

24% for incomes over $89,075 ($178,150 for married couples filing jointly);

22% for incomes over $41,775 ($83,550 for married couples filing jointly);

12% for incomes over $10,275 ($20,550 for married couples filing jointly).

The lowest rate is 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).

What is the 2022 Standard Deduction?

Most taxpayers will claim the standard deduction, which means they will not itemize deductions like charitable donations, mortgage interest, state and local taxes, and other expenses that are eligible to reduce your taxable income. For 2022, the standard deduction for married couples filing jointly will increase from $25,100 to $25,900. This change reduces taxable income for this class of taxpayer by $800. 

For single filers and married individuals who file separately, the standard deduction will increase by $400, from $12,550 to $12,950. For heads of households, the standard deduction will rise by $600 to $19,400 for tax year 2022.

If you are 65 or older—or blind—the additional standard deduction amount beginning in 2022 will be $1,400. The amount for 2021 is $1,350. If you are both 65+ and blind, you get to claim two of those additional deductions.

2022 Earned Income Tax Credits

In 2022, the Earned Income Tax Credit (EITC) will increase for each category of filer. If you are single or married filing jointly and you have no children, the EITC will be $560. For one qualifying child, the maximum credit will be $3,733. That amount climbs to $6,164 for two children and $6,935 for three or more children.

2022 Alternative Minimum Tax

The Alternative Minimum Tax exemption amount for tax year 2022 is $75,900 and begins to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption begins to phase out at $1,079,800). The 2021 exemption amount was $73,600 and began to phase out at $523,600 ($114,600 for married couples filing jointly for whom the exemption began to phase out at $1,047,200).

Other provisions in the IRS’s 2022 adjustments

  • For 2022, as in 2021, 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
  • The maximum credit allowed for adoptions for tax year 2022 is the amount of qualified adoption expenses up to $14,890, up from $14,440 for 2021.
  • For the taxable years beginning in 2022, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $2,850. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $570, an increase of $20 from taxable years beginning in 2021.
  • For tax year 2022, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $280.

Take advantage of PRIME’s expert tax knowledge

In this article, we’ve tried to highlight some of the key provisions in this most recent tax guidance, but the full list is long and detailed. For a comprehensive list of adjustments for 2022, please review Revenue Procedure 2021-45, or make it easy on yourself and talk to one of our expert tax advisors. Our team is always up to date with the most current rules and regulations, and always prepared to advise you on the specific ways your business can take advantage of every deduction opportunity. Remember—when it comes to your business, it’s not necessarily what you make that matters, it’s what you keep. Let us help you keep more of your earnings when it comes to tax time. Set up a consultation today!

2022 Tax Brackets and Updates—FAQ:

Will my tax rate change in 2022?

The IRS did not change any marginal tax rates for 2022, but that doesn’t mean the rate you pay won’t change. To counteract the effects of inflation, the IRS did change the brackets for 2022, so it’s possible that your bracket—and therefor your highest marginal tax rate—may change, even if your income doesn’t change at all.

What are the 2022 tax brackets?

For tax year 2022, the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).

The other rates are:

35%, for incomes over $215,950 ($431,900 for married couples filing jointly);

32% for incomes over $170,050 ($340,100 for married couples filing jointly);

24% for incomes over $89,075 ($178,150 for married couples filing jointly);

22% for incomes over $41,775 ($83,550 for married couples filing jointly);

12% for incomes over $10,275 ($20,550 for married couples filing jointly).

The lowest rate is 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).

Where can I find the full text of the 2022 tax changes?

You can find Revenue Procedure 2021-45 by clicking here.

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