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IRS Announces Key Annual Inflation Adjustments for 2022

December 9, 2021
By: Eva Victor, Director of Wealth Planning at Girard Advisory Services, LLC
 

Couple reviewing finances together at home.

Tax planning is all about thinking ahead. For many individuals, the approaching year end - and upcoming new year - is a time to explore efficient planning opportunities. On November 10, 2021, the IRS released Revenue Procedure 2021-45 announcing inflation adjustments for 2022 (updating amounts under 62 Internal Revenue Code sections). These annual adjustments are made to avoid “bracket creep” and pushing taxpayers into higher tax brackets due to inflation.

Here is a summary of some key updated figures affecting individual taxpayers. These changes apply to the 2022 tax year for taxes filed in 2023.


Standard Deduction

For 2022, the standard deduction will increase by $800 for married couples filing jointly to $25,900; by $400 to $12,950 for single filers and married individuals who file separately; and by $600 to $19,400 for heads of household.

The additional standard deduction amount for anyone who is 65 or older, or blind, will increase to $1,400 (from $1,350 in 2021). Individuals who are both 65 or older, and blind, receive both deductions. The deduction for an individual who can be claimed as a dependent by another taxpayer is limited to the greater of $1,150, or the sum of $400 and the individual's earned income (but not more than the standard deduction of $12,950 for 2022).

 

Income Tax Rates and Brackets

Marginal income tax rates for 2022 remain at 10%, 12%, 22%, 24%, 32%, 35% and 37%. However, the tax brackets are adjusted (indexed) each year to account for inflation. The tax rates apply to the income that falls within the applicable tax bracket range for an individual’s filing status.

Rate
Single
Taxable Income
Married Filing Jointly Taxable Income
Married Filing Separately
Taxable Income
Head of Household Taxable Income
10% $0 - $10,275 $0 - $20,550 $0 - $10,275 $0 - $14,650
12% $10,275 - $41,775 $20,550 - $83,550 $10,275 - $41,775 $14,650 - $55,900
22% $41,775 - $89,075 $83,550 - $178,150 $41,775 - $89,075 $55,900 - $89,050
24% $89,075 - $170,050 $178,150 - $340,100 $89,075 - $170,050 $89,050 - $170,050
32% $170,050 - $215,950 $340,100 - $431,900 $170,050 - $215,950 $170,050 - $215,950
35% $215,950 - $539,900 $431,900 - $647,850 $215,950 - $323,925 $215,950 - $539,900
37% Over $539,900 Over $647,850 Over $323,925 Over $539,900


Maximum Long Term Capital Gains Rates

Long term capital gains rates apply to gains from the sale of capital assets or investments held for more than one year and to qualified dividends. Gains are taxed at a 0%, 15% or 20% rate (lower than ordinary income tax rates) and depend upon taxable income and filing status. The taxable income thresholds for the capital gains tax rates are adjusted each year for inflation. Short term capital gains (on assets or investments held for one year or less) are taxed as ordinary income.


Rate Single
Taxable Income
Married Filing Jointly Taxable Income
Married Filing Separately
Taxable Income
Head of Household Taxable Income
0% Up to $41,675 Up to $83,350 Up to $41,675 Up to $55,800
15% $41,675 - $459,750 $83,350 - $517,200 $41,675 - $258,600 $55,800 - $488,500
20% Over $459,750 Over $517,200 Over $258,600 Over $488,500


Net Investment Income Tax Thresholds

The Net Investment Income Tax is an additional 3.8% surtax on Net Investment Income (NII), on top of the capital gains tax. NII includes, among other things, taxable interest, dividends, gains, passive rents, annuities and royalties. For 2022, the Modified Adjusted Gross Income (MAGI) thresholds are: $200,000 for single taxpayers; $250,000 for married individuals filing a joint return; and $125,000 for a married individual filing a separate return.

 

Child Tax Credit

The 2022 Child Tax Credit is $2,000 per qualifying child, subject to phaseouts, starting at income of $400,000 for joint filers and $200,000 for single taxpayers. At $440,000, joint filers receive no credit. The refundable portion of the Child Tax Credit will increase from $1,400 (for 2021) to $1,500 (for 2022), representing the IRS issued refund if the credit is worth more than the income tax liability. 

 

Earned Income Tax Credit (EITC)

The maximum Earned-Income Credit (EIC) in 2022 for single filers and married individuals filing jointly is $560, if the filer has no children. The maximum credit is $3,733 for one qualifying child, $6,164 for two children, and $6,935 for three or more children (up from $6,728 for 2021).

 

Foreign Earned Income Exclusion

For 2022, the foreign earned income exclusion for U.S. taxpayers working abroad, is $112,000 (increased from $108,700 for 2021).


Alternative Minimum Tax Exemption

The Alternative Minimum Tax (AMT) requires high income taxpayers to calculate their tax bill twice - once under the ordinary income tax system and again under the AMT. The taxpayer then pays the higher amount of the two. The AMT is levied at two rates: 26% and 28%. The 28% AMT rate applies to excess Alternative Minimum Tax Income (AMTI) of $206,100 for all taxpayers, except married couples filing separate returns ($103,050). Under these amounts, the rate is 26%.

The AMTI exemption amount for 2022 is: $75,900 for single taxpayers and begins to phase out once AMTI reaches $539,900; $118,100 for married individuals filing jointly and begins to phase out at $1,079,800; $59,050 for married individuals filing separately.


IRC Section 199A Qualified Business Income Deduction

The Qualified Business Income (QBI) Deduction allows eligible self-employed and small business owners to deduct up to 20% of their QBI (income from “pass through” businesses such as S corporations, partnerships, LLCs). The 2022 income limits are $340,100 for married couples filing jointly; $170,050 for married individuals filing separately; and $170,050 for all others. The phase in range amount is $440,100 for married couples filing jointly; $220,050 for married individuals filing separately; and $220,050 for all others.

 

Estate and Gift Tax Exemptions and Exclusions

The estate and gift tax exemption for 2022 is increased by $360,000 to $12,060,000 (from $11,700,000 for 2021). The exemption applies to lifetime gifts, or estates of decedents ($24,120,000 for married couples if portability is elected by timely filing of IRS Form 706 after the death of the first to die spouse). The generation skipping transfer (GST) tax exemption is also increased to $12,060,000 for 2022. The estate, gift and GST tax rates remain at 40%.

The annual gift tax exclusion increases to $16,000 for 2022 (from $15,000 for 2021). For 2022, the annual exclusion for gifts to a spouse who is not U.S. citizen is increased to $164,000 (from $159,000 in 2021).

 

Consider Current and Prospective Planning Opportunities

Tax planning is a focal point of financial planning. However, strategic planning is required to take advantage of opportunities. The approaching year end - and new year - is a great time to reach out to personal financial, tax and legal advisors who can analyze your financial situation from the tax efficiency point of view, and help you make effective use of available tax exemptions, deductions and other benefits to minimize your tax liability. If you are looking for guidance or assistance with your financial planning, Girard advisors are here to help. Contact us to begin a conversation.

 

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This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.