The IRS has announced changes to the 2022 tax code, which will affect the coming tax return season. The inflation rate in the US reached record heights and in a short time, now at over 30% and consumer prices are rising, so the new tax code aims to reduce the costs of inflation.
Income tax brackets will rise to adjust for inflation and so will the standard deduction, which is claimed by the vast majority of taxpayers.
The idea is that by increasing the basic deduction, as well as expanding the individual brackets, people who have had consistent income over the last couple of years won’t be punished for inflation. These changes make an attempt to combat cost increases by allowing more people to deduct a larger amount, as well as keeping people from crossing into new tax brackets simply because inflation forced them to bring in more income in order to continue within the same cost of living ratios.
How Are Taxes Changing?
The changes are relatively minor, and aimed at trying to keep balance year over year, not a way to drastically cut your taxes. However, some people may notice a more obvious change.
What is the Standard Deduction and How is it Changing?
The Standard Deduction is a set amount a person can claim against their income. If you don’t have at least this amount in itemized deductions/write-offs, then this covers you and helps you pay less to the IRS. Check out this article to learn more about how write-offs work.
Here’s how tax deductions have changed:
- For married couples filing jointly the standard deduction has increased by $800, putting the deduction at $25,900
- For single taxpayers and married individuals filing separately, the standard deduction has been increased by $400, bringing the new threshold to $12,950.
- For heads of households, that deduction threshold has increased by $600, bringing it to $19,400 for tax year 2022.
How Tax Brackets Work and What Has Changed
Tax Brackets are a set of income thresholds that determine the percentage of taxes paid, after your standard or itemized deductions. These brackets have been adjusted slightly to help keep people in the same bracket they have been in, despite minor income changes to accommodate inflation.
Married & Filing Jointly:
10%: $1 – $20,550
12%: $20,550 – $83,550
22%: $83,550 – $178,150
24%: $178,150 – $340,100
32%: $340,100 – $431,900
35%: $431,900 – $647,850
37%: $647,850 +
Individual Single Taxpayers:
12%: $10,275 to $41,775
22%: $41,775 to $89,075
24%: $89,075 to $170,050
32% $170,050 to $215,950
35%: $215,950 to $539,900
for a detailed downloadable copy of this information and more, click here!
What If I Am Eligible For The Earned Income Tax Credit?
The IRS has increased the 2022 maximum Earned Income Tax Credit for qualifying taxpayers to $6,935 for those with three or more children, an increase from $6,728 in the 2021 tax year.
Changes To Other Accounts
If you qualify for a Health Savings Account, the allowed annual contributions was increased by $150 to $4,950. Family plans have also increased by $250 and remaining balances can be rolled over from year to year, while accruing tax-free interest so now you not only have a higher balance to work with, it can grow while you sleep!
The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $20,500, up from $19,500. That’s an additional $1000 you can save by investing in these accounts.
If you run a business, there are more changes that may apply to you. Take a look at this guide to tax limit changes for businesses in 2022.
What This Means For You
Unfortunately, this is a rather moderate tax code change, and it won’t have a large impact on most people, but for those who are on a fixed income, this change helps ensure that inflation won’t affect how far that money goes quite as much. If you are an employee that recently got a raise that put your salary just outside of the tax bracket you’ve been comfortable in, there is a chance this new code has allowed you to stay in that bracket.
There are many ways this code can affect different people in different situations. Please understand this article is intended only as a resource for public information and is not to be misconstrued as individual tax advice.
If you have more questions or concerns regarding these changes, we have professionals at the ready, to give you individualized advice, while providing strategic steps to build your wealth. Get in touch today to see how we can help navigate your unique wealth goals.