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Inflation has been in the news lately, with impacts on everything from the price of a gallon of milk to the price of a gallon of gas. But consumer goods aren’t the only things affected by inflation: your tax rate is, too. It’s a good idea to understand the 2022 inflation adjustments the IRS has recently published. These adjustments are a response to the inflation that has occurred in 2021 and will affect the tax returns you file in 2023.
Tax and Inflation: Why Adjust Tax Rates?
When income is adjusted for inflation, it is important to adjust tax rates as well. Otherwise, an increase in income (that simply maintains the same purchasing power) could push a taxpayer into a higher tax bracket. That would increase their tax rate and tax payment, meaning they would actually have less purchasing power than the year before. That phenomenon is known as “bracket creep,” and IRS adjustments for inflation are designed to combat it.
More than 60 tax provisions have been affected by the adjustments and outlined in IRS Prev. Proc. 2021-45. In this blog post, we will discuss some of the changes most likely to impact you.
Income Tax Brackets Shift Upward, But No Change in Rates
Income tax rates will not change for 2022, but the income level for each bracket will increase. This is best illustrated with a table:
| Tax Rate | Married Filing Jointly | Married Filing Separately | Single | Head of Household |
| 10% | $0 to $20,550 | $0 to $10,275 | $0 to $10,275 | $0 to $14,650 |
| 12% | >$20,550 to $83,550 | > $10,275 to $41,775 | > $10,275 to $41,775 | >$14,650 to $55,900 |
| 22% | >$83,550 to $178,150 | >$41,775 to $89,075 | >$41,775 to $89,075 | >$55,900 to $89,050 |
| 24% | >$178,150 to $340,100 | >$89,075 to $170,050 | >$89,075 to $170,050 | >$89,075 to $170,050 |
| 32% | >$340,100 to $431,900 | >$170,050 to $215,950 | >$170,050 to $215,950 | >$170,050 to $215,950 |
| 35% | >$431,900 to $647,850 | >$215,950 to $323,925 | >$215,950 to $539,900 | >$215,950 to $539,900 |
| 37% | >$647,850 | >323,925 | >$539,900
|
>$539,900 |
Changes to the Standard Deduction
Standard deduction amounts have also been adjusted for 2022 to reflect inflation. The table below shows the amount of the standard deduction for tax year 2021, and the amount adjusted for inflation for 2022.
| Tax Filing Status | 2021 | 2022 |
| Single | $12,550 | $12,950 |
| Married Filing Jointly | $25,400 | $25,900 |
| Married Filing Separately | $12,550 | $12,950 |
| Head of Household | $18,800 | $19,400 |
In addition to the base 2022 standard deduction amount, you may be able to take an additional deduction under certain circumstances, such as if you are 65 or older or blind. Filers who are head of household or single can take an extra deduction of $1,750. This is an increase from the 2021 amount of $1,700. For married taxpayers, the amount increased from $1,350 in 2021 to $1,400 in 2022. If you are both blind and 65 or older, you can take double the extra deduction.
Inflation Adjustments for Estate and Gift Taxation
For the past few years, the annual gift tax exclusion amount has been $15,000. For 2022, that amount increases to $16,000 per individual recipient. Married couples, as always, may each make a gift of the exclusion amount to a single recipient without triggering the need to report the gift on a gift tax return. For instance, a married couple filing jointly could give each of their adult children $32,000 in 2022.
For the past few years, the annual gift tax exclusion amount has been $15,000. For 2022, that amount increases to $16,000 per individual recipient. Married couples, as always, may each make a gift of the exclusion amount to a single recipient without triggering the need to report the gift on a gift tax return. For instance, a married couple filing jointly could give each of their adult children $32,000 in 2022.
The estates of individuals who die in 2022 will have an estate tax exclusion of $12,060,000. This amount is adjusted for inflation from $11,700,000, the amount of the exclusion for estates of individuals who died in 2021. (While the amount of the estate tax exclusion is generally adjusted upward for inflation every year, the exclusion amount itself will reduce to its 2017 level as of December 31, 2025, thanks to the sunset provision of the 2017 Tax Cuts and Jobs Act.)
More IRS Changes This Year: Retirement Plans
In addition to the 2022 inflation adjustments described above, there have been cost-of-living adjustments to pension and retirement plans. Employees can make tax-deferred contributions to 401(k)s, 403(b)s, and 457(b)s of $20,500 in 2022, up from $19,500 in 2021. The “catch-up” contribution limit for these plans for individuals 50 and over remains unchanged at $6,500. Annual contribution limits for defined contribution plans have risen to $61,000 in 2022, up from the 2021 amount of $58,000.
Annual contributions to IRAs will continue to be capped at $6,000 in 2022, as they were in 2021. Likewise, the additional catch-up contribution limit for those aged 50 or older will remain at $1,000; this amount is not subject to cost-of-living adjustments.
However, for Roth IRAs, the income level for contributions has been adjusted. In 2022, the phase-out level for contributions begins at $129,000 for single filers; those with income above $144,000 can no longer contribute. Both of these figures represent a $4,000 increase from 2021. For married taxpayers filing jointly, phase-out begins at an income level of $204,000 and is complete at $214,000. This is a $6,000 increase over the comparable 2021 figures.
If you have questions about tax and inflation, or tax planning in general, we invite you to contact our law office to schedule a consultation.
