IRS announces a slew of changes for the 2022 tax year

The only certainties in life, Ben Franklin once wrote, are death and taxes. You could probably add a third certainty to his list: Taxes are complicated.

The Internal Revenue Service has released its list of inflation-related adjustments for tax year 2022. The changes, which reflect the impact of rising inflation this year, cover 60 tax rate schedules and deductions. They are the biggest modifications in four years and will affect tax returns filed in 2023.

Separately, the IRS has boosted workplace retirement account contributions to $20,500 for 2022, up from $19,500 for 2021. This covers 401k, 403b, and most 457 plans. Be sure to take advantage of this in January, when you can increase retirement deductions from your paycheck.

Some highlights of the inflation-related changes include:

Standard Deduction: The standard deduction for married couples filing jointly for tax year 2022 rises to $25,900 up $800. 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 tax year 2022, up $600.

Tax Brackets: For tax year 2022, the top marginal tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly). The other thresholds generally rose about 3%. They 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).

AMT: 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).

Earned Income Credit: The tax year 2022 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.

Healthcare Flexible Spending: For the taxable years beginning in 2022, 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.

Medical Savings Accounts: For tax year 2022, 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 tax year 2022, for family coverage, the annual deductible is not less than $4,950, 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.

Gifts: The annual exclusion for gifts increases to $16,000 for calendar year 2022, up from $15,000 for calendar year 2021.

Estate Tax: 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.

These are just some of the IRS changes. If you’d really like to get down into the nitty gritty, you can review all of them here.

We’re happy to review these tax changes with you and help determine whether they may affect any of your financial planning strategies. We are not tax experts, however, and will encourage a consultation with your accountant or tax preparer to make a final determination of what is in your best interest.

As always, please don’t hesitate to contact us with questions or concerns.