The Internal Revenue Service (IRS) changes certain tax provisions each year to deal with inflation. The idea is to prevent taxpayers from losing more tax exemptions because they could earn a little more than the previous year, depending on inflation. Ideally, tax limits keep pace with the economy.
The IRS typically announces inflation adjustments for the next fiscal year in November of each year. On November 10, 2021, the IRS announced more than 60 tax limits and provisions for fiscal 2022 (filed in 2023). Knowing what they are and how they could help you plan your tax strategies and spending in 2022.
2022 Tax Brackets
The United States tax system is progressive, so you pay a higher tax percentage the more you earn. If you earn $50,000 one year, but $130,000 another year, you will pay different tax amounts. The tax system is also based on marginal brackets and rates. This means that you will not pay 24% of all your income if you fall into the 24% tax category. You will only pay this commission for the portion of income that falls within this 24% range. You will pay 10%, 12%, and 22% of the remaining income below this limit.
Inflation adjustments do not affect tax rates (the percentage you pay). It only changed the income categories to which the percentages apply.
2022 Tax rate and brackets for single and married filing separately taxpayers
The table below shows the income tax categories for each tax rate for the fiscal year 2022 for single taxpayers and those who are married but filing separate tax returns.
Income Tax Rate
10% from $0 to $10,275
12% from $10,276 to $41,775
22% from $41,776 to $89,075
24% from $89,076 to $170,050
32% from $170,051 to $215,950
35% from $215,951 to $539,900
37% from $539,901 or more
2022 tax rate and bracket for heads of household
Those who are considered as heads of household (HOH) may earn a little more than the individual taxpayer before moving on to the next tax category, at least at lower income levels.
Income Tax Rate
10% from $0 to $14,650
12% from $114,651 to $55,900
22% from $55,901 to $89,050
24% from $89,051 to $170,050
32% from $170,051 to $215,950
35% from $215,951 to $539,900
37% from $539,901 or more
2022 tax rate and bracket for married filing jointly
Income brackets are the most generous for married taxpayers who file joint returns. Their value is double that of individual filers, so they can accommodate two potential earners.
Income Tax Rate
10% from $0 to $20,550
12% from $20,551 to $83,550
22% from $83,551 to $178,550
24% from $178,551 to $340,100
32% from $340,101 to $431,900
35% from $431,901 to $647,850
37% from $647,851 or more
2022 Standard Deductions
The standard deduction is an amount that you can deduct from your total gross income so that you only pay income tax on your balance. They also differ depending on your marital status for filing purposes. Below are the standard deduction rates for the fiscal year 2022 that apply to the income tax return you will be filing in 2023.
2022 Capital gains and income tax rate
Capital gains tax can come due when you sell an asset or investment for more than the amount paid. Depending on how long you hold the asset, the difference may be taxed at more favorable rates than normal tax intervals. Income is taxed at normal tax rates, along with the rest of your income, if you've owned it for a year or less. Long-term capital gain rates apply to business income you have had for more than a year.
Single Taxpayers
0% from $41,675 or less
15% from $41,675 to $459,750
20% from $459,750 or more
Heads of Households
0% from $55,800 or less
15% from $55,800 to $488,500
20% from $488,500 or more
Married but filing jointly
0% from $83,350 or less
15% from $83,350 to $517,200
20% from $517,200 or more
Married taxpayers filing separately have the same income limit as taxpayers filing individually on capital gains tax rates of 0% to 15%:$41,675. However, they have a different maximum income limit of $258,600 at the rate of 15%. Income above this amount triggers the 20% capital gains tax rate.
Alternative Minimum Tax for 2022
The Alternative Minimum Tax (AMT) is a provision that prevents high-income people from asking for so many tax incentives to the point where they end up paying negligible tax on their income.
If you earn above a certain income threshold, you have to calculate your income tax twice: once according to the usual rules and a second time according to the AMT rules. Again, the AMT adds certain income deductions and exclusions that you can claim under the normal rules to reduce your taxable income. Then you pay the method, which results in a higher tax.
AMT excludes income up to certain limits depending on your filing status. For the fiscal year 2022, you only need to calculate AMT if you earn more than $75,900 as a single taxpayer; it starts to drop by $539,900 for married taxpayers who file their tax return jointly; you will need to calculate the AMT if you earn $118,100 or more; it starts to phase out at $1,079,800.
Earned Income Tax Credit
The maximum earned income tax credit for those who qualify and have three or more dependent children will increase to $6,935 in 2022. It increases to $6,164 if you have two children, $3,733 if you have a child, and $560 if you have none.
The Child Tax Credit
The child tax credit amount is not adjusted for inflation but rather the portion of the credit that can be claimed as a tax refund. In 2022, that figure is $1,500.
Savings Limits
Inflation-adjusted limits also apply to the amounts you can save for different pension plans and other advantageous savings plans and exclude these tax contributions.
By 2022, you can contribute up to $2,850 to a Flexible Spending Arrangement (also known as a Flexible Spending Account or FSA).
The contribution limit for 401(k), 403(b), 457, and savings plans will increase to $20,500 in 2022. Contributions to SIMPLE retirement accounts increase to $14,000. The contribution limits for Roth and traditional IRAs have not changed.
Estate and Gift Taxes
Very large estates must pay federal property tax on the portion of their assets that exceeds certain limits, and those limits are also indexed to inflation. The first $12.06 million will be tax-exempt in 2022.
The federal gift tax applies to gifts you give to individuals (not charities) for a certain amount each year. This amount is known as an annual exclusion per person per year. It was set at $15,000 for a few years until 2021 but is $16,000 in 2022.
Summary
The IRS adjusts various tax provisions each year to keep pace with rising inflation.
The effects of inflation-related adjustments affect the income limits eligible for various tax exemptions, as well as the amount of the standard deduction and certain tax credits.
Tax rates do not change every year unless new changes in tax law come into effect, but in the income brackets to which they apply, so it is important to know where your income is each year.
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