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How Will IRS Inflation Adjustments Impact Your 2022 Tax Year Returns?

We’ve all felt the pinch of inflation from grocery stores to gas stations. Now the IRS has followed suit by adjusting income tax tables, standard deduction levels and more for 2022 tax year returns.

Near the end of 2021 the IRS issued Rev. Proc. 2021-45, which adjusted for inflation a wide array of amounts regarding individual, business and estate and trust returns and related tax issues. This was partially due to a drastically rising inflation rate, which has gone from 1.7% in November 2020 to 7.04% in December 2021.

Here’s how these changes may affect the 2022 tax returns you’ll file in 2023.

Income Tax Tables

Among the most common figures referenced are the income tax tables used by individuals, estates and trusts, especially those that will have tax bracket thresholds higher than they were in 2021. As an example, the lowest bracket for single individuals outside of heads of household and surviving spouses (which reflects a 10% tax on taxable income) has a 2022 ceiling of $10,275. This reflects a $325 increase from 2021’s $9,950 ceiling.

Standard Deduction

It’s expected that single taxpayers and married taxpayers filing separately will see increases from $12,550 to $12,950. Married taxpayers filing jointly will see an increase from $25,100 to $25,900. And heads of household will see an increase from $18,800 to $19,400. However, these are the only the main changes due to inflation. There are several other new deduction amounts you should consider:

  • The unearned income of minor children (or “kiddie tax”), used to reduce a child’s net unearned income, will increase to $1,150.
  • The maximum capital gains 0% rate will reach $83,350 for married filing jointly, $41,675 for single and married filing separately, $55,800 for heads of household and $2,800 for estates or trusts.
  • Similarly, the 15% maximum capital gains rate will be at $517,200 for married filing jointly, $258,600 for married filing separately, $488,500 for heads of household, $459,750 for singles and $13,700 for estates or trusts.
  • The alternative minimum tax exemption is now $118,100 for married filing jointly or surviving spouses, $75,900 for singles, $59,050 for married filing separately and $26,500 for estates or trusts.
  • Certain elementary and secondary teacher expense deductions have been raised to $300, and cafeteria plans have had their dollar limitation for the voluntary employee salary reductions for health flexible spending arrangement contributions changed to $2,850.

Section 199A Deductions

The threshold amount for qualified business income has been changed to $340,100 for married couples who file jointly and $170,050 for all others. At the same time, the phase-in range amount has changed to $440,100 for married filing jointly and $220,050 for all other classes.

Interest on Educational Loans

This interest will now start to phase out when modified adjusted gross income (MAGI) exceeds $70,000 for single and married filing separately, or $145,000 for joint returns. It will phase out completely when MAGI reaches $85,000 for single and married filing separately or $175,000 for married filing jointly.

Additional Changes

New limitations have also been placed on the use of cash accounting methods. In the past, it’s been at a lower amount. However, increased inflation has caused the gross receipts test under Section 448(c) — which is also applicable to many other business provisions — to be met when annual gross receipts for the three-tax-year period that ends with the 2022 tax year do not exceed an average of $27 million.

For the foreign earned income exclusion, you may now exclude $112,000. Regarding the unified credit against estate tax, the basic exclusion amount for decedents passing in 2022 has increased to $12,060. At the same time, the annual gift exclusion has risen to $16,000 to anyone person being excluded from total taxable gifts as listed under Section 2503 when made during the 2022 tax year.

The wide span of Rev. Proc. 2021-45 reflects the profound impact of recent inflation. However, the IRS cautions that some of the legislation pending before Congress may also affect 2022 tax returns. For this reason, it recommends you consult additional IRS guidance that comes out during the tax year. We also strongly suggest you enlist an experienced tax CPA to help you understand these changes and how they apply to your return.

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