The IRS announced changes to the tax code for the 2022 tax year. The changes apply to 2022 federal tax returns that taxpayers will file in 2023 and come as inflation hit a more than 30-year high in October 2021 as consumer prices continue to surge, according to a Labor Department report.
Income tax brackets will rise to adjust for inflation and so will the standard deduction, which is claimed by the vast majority of taxpayers.
“Between the standard deduction increasing a little bit and just the inflation of the brackets, in general, if your income is fairly stable from last year to this year, you’ll see a little bit of a tax cut,” says Jeffrey Levine, certified financial planner and CPA, who is also the chief planning officer at Buckingham Wealth Partners in St. Louis.
The decision by the IRS is “a protective mechanism,” says Mark Prendergast, a CPA and CFP who is also the director of tax strategies at Inspired Financial in Huntington Beach, California. “This will prevent taxpayers from paying higher taxes merely because of inflation,” because “no matter what your income level, inflation should not push you into a higher tax bracket.”
The effect the adjustments will have on your bottom line will depend on how you file. Here’s an overview of what’s going to be different.
The standard deduction — a static deduction anyone can claim — will increase depending on how you file your 2022 federal return. Here are the new numbers, according to the IRS:
For married couples filing jointly the standard deduction 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.
The IRS says it will change the tax brackets, which is the range of incomes subject to a certain income tax rate for 2022. After the standard deduction, or other itemized deductions and tax breaks have been taken, here’s how your income will be taxed.
10%: Taxable income up to $20,550 (up from $19,900 for 2021)
12%: Taxable income between $20,550 to $83,550 (up from $19,900 to $81,050 for 2021)
22%: Taxable income between $83,550 to $178,150 (up from $81,050 to $172,750 for 2021)
24%: Taxable income between $178,150 to $340,100 (up from $172,750 to $329,850 for 2021)
32%: Taxable income between $340,100 to $431,900 (up from $329,850 to $418,850 for 2021)
35%: Taxable income between $431,900 to $647,850 (up from $418,850 to $628,300 for 2021)
37%: Taxable income over $647,850 (up from $628,300 for 2021)
10%: Taxable income up to $10,275 (up from $9,950 for 2021)
12%: Taxable income between $10,275 to $41,775 (up from $9,950 to $40,525 for 2021)
22%: Taxable income between $41,775 to $89,075 (up from $40,525 to $86,375 for 2021)
24%: Taxable income between $89,075 to $170,050 (up from $86,375 to $164,925 for 2021)
32% Taxable income between $170,050 to $215,950 (up from $164,925 to $209,425 for 2021)
35%: Taxable income between $215,950 to $539,900 (up from $209,425 to $523,600 for 2021)
37%: Taxable income over $539,900 (up from $523,600 for 2021)
Since prices are rising, this probably won’t equate to any significant savings, Prendergast says, but retirees with fixed income would pay less in taxes because “their income is static, but they have a higher standard deduction, so that their taxable income is lower.”
To account for inflation, the IRS increased the 2022 maximum Earned Income Tax Credit amount to $6,935 for qualifying taxpayers who have three or more qualifying children, up from $6,728 for tax year 2021.
The IRS recently announced changes to retirement contribution limits. You can save an extra $1,000 in your 401(k) in 2022, the IRS announced on November 4. “One way to reduce your taxes is to make sure you’re maxing out your contributions,” says Levine.
If you qualify for and have a Health Savings Account, recent changes affect you too. The individual limit for annual contributions was previously increased for 2022 to $4,950, a $150 jump. The family plan maximum has jumped $250 to $7,400. HSA balances can be rolled over from year to year and can accrue interest tax-free.
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