In November 2021, the IRS issued Revenue Procedure 2021-45, which provided inflation adjustments for tax provisions that will be applicable for the 2022 tax year. The IRS calculates these adjustments annually based on changes in the Chained Consumer Price Index. Inflation hit a 39-year high of 7% in December 2021, meaning that the prices of goods and services in the U.S. had increased by 7% over the previous 12 months. As a result, the inflation adjustments for 2022 tax returns are larger than in recent years. Because the adjustments relate to the 2022 tax year, they will impact tax returns that are filed by individuals and businesses during 2023.
Individual Income Tax
The IRS revenue procedure includes updates to over 60 tax provisions, many of which relate to individual income tax. Tax brackets were adjusted across the board, with the top ordinary income tax rate of 37% now applying on income over $539,900 for single filers and $647,850 for married couples filing jointly.
2022 Tax Brackets for Individuals
|Tax Bracket/Rate||Single||Married Filing Jointly||Head of Household|
|10%||$0 – $10,275||$0 – $20,550||$0 – $14,650|
|12%||$10,276 – $41,775||$20,551 – $83,550||$14,651 – $55,900|
|22%||$41,776 – $89,075||$83,551 – $178,150||$55,901 – $89,050|
|24%||$89,076 – $170,050||$178,151 – $340,100||$89,051 – $170,050|
|32%||$170,051 – $215,950||$340,101 – $431,900||$170,051 – $215,950|
|35%||$215,951 – $539,900||$431,901 – $647,850||$215,951 – $539,900|
In addition, the maximum capital gains tax rate of 20% now applies to single filers with income over $459,750 and to married couples filing jointly with income over $517,200. Single taxpayers with taxable income below $41,675 (or married couples filing jointly with taxable income below $83,350) remain eligible for a 0% tax rate on capital gains.
The standard deduction amount became relevant for many taxpayers after it was nearly doubled by the Tax Cuts and Jobs Act of 2017 (“TCJA”), combined with the simultaneous repeal or limitation of many itemized deductions. In 2022, the standard deduction will be increased by $400 for single taxpayers and $800 for married taxpayers filing a joint return, up to $12,950 and $25,900, respectively.
Limitations on contributions to certain tax-deferred accounts have also been adjusted. For the 2022 tax year, employees can contribute up to $20,500 to 401(k) and other similar retirement plans, up from $19,500 in 2021. Self-employed individuals with a SEP IRA can set aside up to $61,000 for their retirement, subject to income limitations. The maximum amount of contributions to a health savings account will be $3,650 for self only and $7,300 for family coverage, an increase of approximately 1.4% from 2021. The contribution limit for health flexible spending arrangement has been increased as well, up from $2,750 in 2021 to $2,850 in 2022.
As part of the TCJA, a new deduction was created allowing for individuals to deduct up to 20% of their income from qualifying pass-through businesses such as partnerships, S corporations and sole proprietorships. The qualified business income deduction is limited for high-income taxpayers if the business does not have sufficient investments in depreciable property or employees, or if it is engaged in specified services such as accounting, consulting and law. The limitations phase in over a range of taxable income – for tax year 2022, single taxpayers with income under $170,050 ($340,100 for married taxpayers filing jointly) are eligible for the full deduction, while those with income over $220,050 ($440,100 if married) are subject to the full limitations.
Estate and Gift Tax
Two significant adjustments were made with respect to estate and gift taxes, which are taxes on the transfer of wealth between individuals. The annual exclusion for gifts was increased by $1,000, as donors can now give up to $16,000 each year to any individual without incurring gift tax or utilizing their combined lifetime exemption from estate and gift taxes. The combined exemption amount rose by $360,000, from $11,700,000 to $12,060,000, meaning that a decedent dying in 2022 can pass up to $12,060,000 on to his or her heirs tax-free. These amounts are doubled for married couples if portability of the credit is properly elected on the predeceased spouse’s estate tax return.
Planning Tip: High-net-worth individuals who have utilized most or all of their combined estate and gift tax exemption should consider making additional gifts of up to $360,000 before the end of the year. This strategy will lock in the benefit of the inflation adjustment in the event that Congress passes tax legislation that reduces the available exemption amount for a future tax year.
Several other income thresholds, deduction amounts and allowable credits or exclusions were also adjusted by Revenue Procedure 2021-45, some of which are summarized below:
- The maximum amount of foreign-earned income that can be excluded from taxable income in 2022 is $112,000, up from $108,700 in 2021.
- Individuals subject to the alternative minimum tax (“AMT”) will be able to utilize an increased AMT exemption amount of $75,900 for single filers and $118,100 for married couples filing jointly, with the maximum AMT tax rate of 28 percent now applying to alternative minimum taxable income in excess of $206,100.
- The refundable portion of the child tax credit will be $1,500 in 2022, an increase of $100 from 2021.
- The annual gift tax exclusion for gifts to non-US citizen spouses increased by $5,000, up to $164,000 in 2022.
- Businesses will be eligible to use the cash method of accounting if their average annual gross receipts for the three-year period ending in 2022 do not exceed $27 million (as compared to $26 million for the 2021 tax year).
The 2022 inflation adjustments provided by the IRS may only be changes of a few percentage points but can in some cases have a material impact on the calculation of tax liability or eligibility for tax breaks. If you have questions about how the inflation adjustments may impact your tax situation, please contact your Bennett Thrasher tax advisor by emailing email@example.com.