Every year, the Internal Revenue Service updates certain tax provisions to keep pace with inflation. Back in November, it announced inflation adjustments for more than 60 tax provisions for 2022. Understanding these updates can help taxpayers plan their tax and investment strategies for 2022.
One big change is the increase in the 401(k) limit to $20,500 from $19,500. The IRS also updated the Earned Income Tax Credit, Medical Savings Account deductibles, and the annual exclusion for gifts.
With that in mind, take a moment to read up on important tax-related changes before you file your 2021 tax return. And if you've already filed, see just how much they impacted your return.
TAXES 2022:Inflation is eroding the value of tax deductions and exemptions
Standard deduction
The standard deduction for married couples filing jointly for tax year 2022 rises to $25,900, up $800 from the prior year.
For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 for 2022, up $400. For heads of households, the standard deduction will be $19,400 for tax year 2022, up $600.
Marginal rates
Here are the marginal rates for 2022 based on income level.
- 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly)
- 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)
- 10% for single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly)
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Alternative minimum tax
The Alternative Minimum Tax (AMT) exemption amount for tax year 2022 increased to $75,900 and begins to phase out when taxpayer income reaches $539,900. The exemption for married couples filing jointly is $118,100 and begins to phase out at $1,079,800.
Taxpayers can expect to pay more
The IRS's inflation adjustments, however, are not perfect. The changes result in about a 3% adjustment – even though inflation the past year increased by 7%. Several provisions of the tax code were not adjusted to inflation. As a result, taxpayers can expect to pay more in 2022.
The limit of $3,000 in capital loss deductions from the sale of certain assets (such as stocks) have remained unchanged since 1977. The capital gains exclusion for the sale of a primary residence – $500,000 for couples, $250,000 for singles – also has not increased. These amounts have not changed since 1997, despite home prices more than doubling on average in the past 20 years.
Wage increases can be offset by inflationary gains, and can also push taxpayers into a higher tax bracket. Many states also don’t adjust components of their state taxes in line with inflation. These elements act as a tax increase by themselves, especially during periods of inflation.
HOW TO USE YOUR REFUND TO EASE :Put that money toward paying off credit cards or overdue bills
The bottom line
Even though the IRS has adjusted its tax brackets to keep pace with inflation, with higher-than-expected inflation and some federal and state provisions remaining the same, some taxpayers can expect to pay more in 2022. If you're worried that might be the case, you should update your financial plans. You can take advantage of tax-deferred investment accounts and review spending to minimize the impact inflation will have on your taxes.
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