IRS Announces 2022 Inflation-Adjusted Tax Rates for Individuals by Jack Winter, CPA/PFS, CFP
Posted on December 02, 2021
The IRS has released the annual inflation adjustments to various provisions of the tax code for 2022, noting that the changes are significant due to increases in consumer prices and inflation over the past 12 months. Individual taxpayers should consider these changes very carefully as they plan for tax efficiency in the year ahead and as they prepare to file their 2021 tax returns in 2022. In addition, taxpayers should note that these rates may change again over the following 24 months, depending on Congressional action to reform the tax code.
Marginal Income Tax Rates
For tax years beginning on Jan. 1, 2022, there continues to be seven individual tax brackets with marginal rates topping out at 37 percent.
- 37 percent for individuals with income above $539,900 ($647,850 for married couples filing jointly);
- 35 percent for individual with income above $215,950 ($431,900 for married couples filing jointly);
- 32 percent for individuals with income greater than $170,050 ($340,100 for married couples filing jointly);
- 24 percent for individuals with income greater than $89,075 ($178,150 for married couples filing jointly);
- 22 percent for individuals with income exceeding $41,775 ($83,550 for married couples filing jointly);
- 12 percent for individuals with income exceeding $10,275 ($20,550 for married couples filing jointly); and
- 10 percent for individuals with income of $10,275 or less ($20,550 for married couples filing jointly).
The income tax brackets for trusts and estates also increase in 2022 to the following:
- 37 percent for income greater than $13,450;
- 35 percent for income between $9,850 and $13,450;
- 24 percent for income between $2,750 and $9,850; and
- 10 percent income of $2,750 or less
Standard Deduction vs Itemized Deductions
The standard deduction for individual taxpayers increases in 2022 to $12,950, up from $12,550 in 2021. For married couples filing joint tax returns, the standard deduction increases to
to $25,900, up from $25,100 in the prior year.
Taxpayers whose allowable expenses exceed the standard deduction may instead itemize their deductions to reduce their taxable income and related federal tax liabilities for the year. These deductible expenses include student loan interest, mortgage interest, charitable donations and qualifying medical and dental expenses as well as up to $10,000 paid toward state and local taxes.
Estate and Gift Taxes
The maximum amount a decedent who dies in 2022 can exclude from his or her taxable estate is $12,060,000, up from $11,700,000 for estates of decedents who died in 2021. For married couples filing jointly, the federal estate tax exemption in 2022 is $24,120,000. Depending on an individual’s state of residence, he or she may also be subject to estate and inheritance taxes at the local level.
The maximum amount individuals may gift in 2022 to as many people as they wish without incurring federal gift tax increases for the first time in four years from $15,000 to $16,000 in 2022. Married spouses who are both U.S. citizens, however, can continue to make an unlimited number of tax-free gifts to each other. When one spouse is not a U.S. citizen, only the first $164,000 of spousal gifts may be excluded from the total amount of taxable gifts for 2022.
Alternative Minimum Tax (AMT)
For individual taxpayers, the AMT exemption in 2022 $75,900 and begins to phase out when income reaches $539,900. For married coupled filing jointly, the AMT exemption in 2022 is $118,100, which begins phase out when income is $1,079,800.
Minor children younger than 19 years of age and college students younger than 24 with unearned income (i.e. investment income) of $1,150 or more in 2022 from sources other than salary and wages will be subject to tax at the same rate as trusts and estates. Parents may elect to include on their tax returns an eligible child’s unearned income that is between than $1,100 but less than $11,000.
Adoption Tax Credit
The maximum credit taxpayers may receive for qualified adoption expenses incurred in 2022 increases to $14,890, up from $14,440 for 2021.
Earned Income Tax Credit
The maximum Earned Income Tax Credit in 2022 is $6,935 for qualifying taxpayers with three or more qualifying children. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.
Foreign Earned Income Exclusion
The foreign earned income exclusion in 2022 increases to $112,000 up from $108,700 for tax year 2021.
The dollar amount that employees may contribute in 2022 to a health flexible spending account via salary deferral increases to $2,850. The maximum amount of unused funds account owners may carryover from 2022, if their plans allow, is $570.
For taxpayers with self-only coverage in a Medical Savings Account, plans must have an annual deductible that is not less than $2,450 and no more than $3,700, and the maximum out-of-pocket expense limit is $4,950. For family coverage, the annual deductible may not be less than $4,950 or more than $7,400, with an out-of-pocket expense limit of $9,050.
Deduction for Pass-Through Business Owners
The Section 199A deduction of up to 20 percent of qualified business income (QBI) that is available to eligible sole proprietors and owners of pass-through businesses (i.e. S Corporations), is subject to income limitations. For 2022, the deduction is reduced when taxable income exceeds $170,050 for individuals, or $340,100 for married couples filing jointly and is phased out completely when individual income reaches $220,050, or $440,100 for married couples filing jointly.
About the Author: Jack Winter, CPA/PFS, CFP, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides estate planning, tax structuring and business advisory services to individuals, families and business owners. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at firstname.lastname@example.org.