With the end of the year in sight, the IRS has announced inflation adjustments taking effect in the new year. This does not directly affect the taxes you’ll be filing by April 15, 2022. Rather, these adjustments generally apply to tax returns you will be filing in 2023. Although that seems far away, it pays to know the changes now so you can adjust your financial plans accordingly.
The list of changes is long, but here are some of the most significant:
- The standard deduction for married couples filing jointly for tax year 2022 rises to $25,900, up $800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 for 2022, up $400, and for heads of households, the standard deduction will be $19,400 for 2022, up $600.
- Marginal rates: For tax year 2022, the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).
- The other income tax rates are:
- 35% for incomes over $215,950 ($431,900 for married couples filing jointly).
- 32% for incomes over $170,050 ($340,100 for married couples filing jointly).
- 24% for incomes over $89,075 ($178,150 for married couples filing jointly).
- 22% for incomes over $41,775 ($83,550 for married couples filing jointly).
- 12% for incomes over $10,275 ($20,550 for married couples filing jointly).
- The lowest rate is 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).
- The alternative minimum tax exemption amount for tax year 2022 is $75,900 and begins to phase out at $539,900 ($118,100 for married couples filing jointly, for whom the exemption begins to phase out at $1,079,800). The 2021 exemption amount was $73,600 and began to phase out at $523,600 ($114,600 for married couples filing jointly, for whom the exemption began to phase out at $1,047,200).
- The maximum Earned Income Tax Credit amount is $6,935 for qualifying taxpayers who have three or more qualifying children, up from $6,728 for tax year 2021. The revenue procedure contains a table providing the maximum EITC amount for other categories, income thresholds and phase-outs.
- The monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $280.
Health plan adjustments
- The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $2,850. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $570, an increase of $20 from taxable years beginning in 2021.
- For participants who have self-only coverage in a medical savings account, the plan must have an annual deductible that is not less than $2,450, up $50 from tax year 2021, but not more than $3,700, an increase of $100 from tax year 2021. For self-only coverage, the maximum out-of-pocket expense amount is $4,950, up $150 from 2021. For family coverage, the annual deductible is not less than $4,950 for tax year 2022, up from $4,800 in 2021; however, the deductible cannot be more than $7,400, up $250 from the limit for tax year 2021. For family coverage, the out-of-pocket expense limit is $9,050 for tax year 2022, an increase of $300 from tax year 2021.
Other key changes
- The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in Section 25A(d)(2) of the Internal Revenue Code is not adjusted for inflation for taxable years beginning after December 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint filers).
- The foreign earned income exclusion is $112,000, up from $108,700 for tax year 2021.
- Estates of decedents who die during 2022 have a basic exclusion amount of $12,060,000, up from a total of $11,700,000 for estates of decedents who died in 2021.
- The annual exclusion for gifts increases to $16,000 for calendar year 2022, up from $15,000 for calendar year 2021.
- The maximum credit allowed for adoptions for tax year 2022 is the amount of qualified adoption expenses up to $14,890, up from $14,440 for 2021.
