By: Ellen R. Swing, Director of Finance & Accounting, COFACC
The Internal Revenue Service announced the most recent annual inflation adjustments that will affect the tax bill of taxpayers for the year 2022 which will be filed in 2023. This year’s adjustments are more significant than in recent years as the US inflation rate hits a 39-year high of 7% in December 2021. The IRS has adjusted tax rate schedules, standard deduction levels, credits, tax advantage limits, and other tax items that are factored into a 2022 tax return. Following are the adjustments worth noting in strategizing your tax liability for 2022:
1. Tax Brackets Increase
Your tax bracket prompts your tax bill calculation. To keep pace with inflation, the IRS makes changes to these tax brackets to fight inflation and to help taxpayers in the lower brackets pay less. It is worth mentioning that the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).
The table below shows the adjusted federal tax brackets for 2022:
|Tax Rate||For Single Filers||For Married Individuals Filing Joint Returns||For Heads of Households|
|10%||$0 to $10,275||$0 to $20,550||$0 to $14,650|
|12%||$10,275 to $41,775||$20,550 to $83,550||$14,650 to $55,900|
|22%||$41,775 to $89,075||$83,550 to $178,150||$55,900 to $89,050|
|24%||$89,075 to $170,050||$178,150 to $340,100||$89,050 to $170,050|
|32%||$170,050 to $215,950||$340,100 to $431,900||$170,050 to $215,950|
|35%||$215,950 to $539,900||$431,900 to $647,850||$215,950 to $539,900|
|37%||$539,900 or more||$647,850 or more||$539,900 or more|
- Standard Deduction Increases
The standard deduction increased by $400 for single filers and by $800 for joint filers. Most individual taxpayers in the lower brackets choose the standard over itemized deduction. Table below reflects these changes.
|Filing Status||Deduction Amount|
|Married Filing Jointly||$25,900|
|Head of Household||$19,400|
3. Alternative Minimum Tax (AMT) Increases
The alternative minimum tax, or AMT, is a second method of calculating federal income tax liability by letting the taxpayer itemize deductions instead of taking the standard deduction. This method is an option taken by most high-income individuals with significant aggregate itemized deductions to allow for lower tax liability. The single taxpayer exemption for tax year 2022 increased to $75,900. That maximum exemption begins to phase out when the income reaches $539,900. The exemption for married couples filing jointly is $118,100 and begins to phase out at $1,079,800. The 28% AMT rate applies to excess AMTI of $206,100 for all taxpayers ($103,050 for married couples filing separate returns).
|Filing Status||Exemption Amount|
|Married Filing Jointly||$118,100|
4. Capital Gains Tax Increase
Income thresholds on the long-term capital gains have been increased as shown in the table below. Capital gains are profits from the sale of a property or an investment. Tax is levied according to the term of ownership. The longer you hold on to the asset, the lower you will pay tax. They are considered long-term gains if they are profits on the assets that are held for at least a year. Short-term gains are profits on assets that are held for less than one year and are taxed as ordinary income.
|Tax Rate||For Unmarried Individuals, Taxable Income Over||For Married Individuals Filing Joint Returns, Taxable Income Over||For Heads of Households, Taxable Income Over|
5. Estate Tax Exemption Limits and Gift Tax Limits Increase
Gifting is an effective strategy to reduce the tax liability against the estates of taxpayers with high net worth. As a provision from The Tax Cuts and Jobs Act, the lifetime federal gift and estate tax exemption increased to $12.06 million per individual and $24.12 million for married couples in 2022. The gift tax annual exclusion increases to $16,000 from $15,000 of previous year. This is the amount one can give to each person before gift taxes are assessed.
- HSA Contribution Limits Increase
Health Savings Account (HSA) is a savings account that allows individuals to make pre-tax contributions to spend on qualified medical expenses. This is another tax strategy because the money set aside in this account is not taxed for as long as it is used to pay for medical expenses. Additionally, once a taxpayer turns 65, it can be used for anything, but tax will be assessed on withdrawals that aren’t used to pay for medical expenses. This has become a viable option for retirement savings for many because of tax deferment and growth potential. For 2022, the maximum HSA contribution limits increased to $3,650 for an individual and $7,300 for family coverage.
- Income Limits for Contributions to a Roth IRA Increase
A Roth IRA or individual retirement account (IRA) under United States law allows after-tax contributions that are generally not taxed upon distribution, provided certain conditions are met. Individuals take advantage of the after-tax benefits which are tax deferment and tax-free savings growth potential. One can withdraw contributions at any time and any potential earnings can be withdrawn tax-free in retirement. However, not everyone can contribute to a Roth IRA because of IRS income limits. For individuals who don’t qualify because of income exceeding the threshold, a traditional IRA or other retirement savings account is available. Table reflects the income limit increases Roth IRA contributions:
|Married Filing Jointly (MAGI)||Married Filing Separately (MAGI)||Maximum Contribution for individuals under age 50||Maximum Contribution for individuals age 50 and older|
|$214,000 & over||$10,000 & over||$0||$0|
Adjustments are made by the IRS on different tax items every year. It is advised that one keeps a sharp eye on the changing tax laws as they can affect different taxpayers in different ways. The goal is to minimize tax liability and set aside money for savings or investment.