How the 2022 IRS Tax Changes Will Affect You

How the 2022 IRS Tax Changes Will Affect You

With the new year of course comes new changes to the tax code. How do the new 2022 IRS Tax Changes affect you?

In 1789, Benjamin Franklin said, “…nothing is certain but death and taxes.”

“Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes” – Benjamin Franklin. 

If Franklin were alive today, he might add “inflation” to the list.

The current rate of inflation has climbed to 6.8% in November 2021 – the highest it has been since 1982.

As inflation rises, so do the prices of things you buy like food, clothing, gas, and more.

Hopefully, your salary or business income rises as well.

But as you make more income, you may rise into higher tax brackets and leave you worse off.

The IRS Helps Adjust for Inflation

The IRS knows that inflation pushes you into a higher tax bracket, and on November 10, 2021, they announced their inflation adjustments for the 2022 tax year.

2021 was a rough year for many. The high inflation rate is due to supply-chain issues, labor shortages, and other economic issues, resulting in reduced purchasing power.

The seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top marginal tax rate of 37% applies to those with taxable income higher than $539,900 for single filers and $647,850 for married couples filing jointly.

The other 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).

Note- You probably do not fall into just one tax bracket. Confused about tax brackets and income tax rates See our article on Marginal vs. Effective Tax Rates.

The average income bracket levels increased by a little more than 3% for 2022. While this doesn’t seem like much, it’s the largest increase since Congress changed the tax code in 2017. For some of the brackets, it is the most significant increase since 2009 during the recession.

And while the IRS changes the federal income bracket annually according to the Tax Foundation15 states do not. 

What this means for you:

The IRS increases the tax brackets because they assume, due to inflation, people’s salaries also increase. Their goal is to make sure you pay about the same amount in taxes every year. However, most people are not fortunate enough to have their salaries increase every year to keep up with inflation, and therefore, might see a decrease in the amount of taxes they pay.

Your Standard Deduction and Personal Exemption

The standard deduction reduces your taxable income. For the 2022 tax year, the standard deduction increases to $12,950 for single filers and married filers filing separately. It increases to $25,900 for married filers filing jointly and $19,400 for heads of households.

The standard deduction is also $1,350 higher for those over 65 or blind and $1,650 higher if also unmarried and not a surviving spouse in 2021. 

For the 2022 tax year, this is $1,400 higher for those over 65 and $1,750 higher if they are also unmarried and not a surviving spouse.

What this means for you:

Similar to the tax bracket increase, the IRS tries to match inflation with what they assume are raising wages. Additionally, increasing the standard deduction means it is more difficult for people with mortgages to use that to their tax advantage.

Capital Gains Tax

You will incur capital gains taxes if you sell a capital asset for a profit, like stocks or real estate. If you hold the asset for less than a year, you will pay short-term capital gains tax on the profit at the same rate as taxes on your ordinary income.

If you hold the asset for more than one year and sell the asset in 2022, you will pay the following long-term capital gains tax.

  • Unmarried Individuals: 
    • 15% for amounts over $41,675; 20% amounts over $459,750
  • Married Individuals filing jointly
    • 15% for amounts over $83,350; 20% amounts over $517,200
  • Heads of Households
    • 15% for amounts over $55,800; 20% amounts over $488,500

What this means for you:

By increasing the threshold for 15% capital gains tax, the IRS is allowing for more individuals to take advantage of the 0% long term capital gains tax.

Alternative Minimum Tax

The alternative minimum tax (AMT) was established to ensure certain taxpayers pay at least a minimum amount of taxes.

The AMT is calculated under different rules that limit certain breaks for some taxpayers, so their tax bill is higher. AMT rates are 26% or 28%.

Incomes above the annual AMT exemption amounts typically trigger the AMT tax.

These taxpayers typically have higher incomes and do two income tax calculations. One is under the regular rules, and the other is under the stricter AMT rules. The taxpayer then pays the higher amount to the IRS.

The AMT uses a definition of taxable income called Alternative Minimum Taxable Income (AMTI). So low- and middle-income taxpayers are not subject to the AMT; taxpayers can exempt a significant amount of their income from AMTI. 

But this exemption phases out for high-income taxpayers. 

The AMT is levied at two rates: 26% and 28%. The AMT exemption amount for 2022 is $75,900 for singles and $118,100 for married couples filing jointly 

For the tax year 2022, the 28% AMT rate applies to excess AMTI of $206,100 for all taxpayers ($103,050 for married couples filing separate returns).

The calculations can get a bit complicated, but the AMT exemptions phase out at 25 cents per dollar earned once AMTI reaches $539,900 for single filers and $1,079,800 for married taxpayers filing jointly.

What this means for you:

By increasing the baseline amount for AMT, and assuming that your salary did not increase, this could mean that you no longer have to pay AMT.

2022 Child Tax Credit

The maximum Child Tax Credit is $2,000 per qualifying child. This is not adjusted for inflation. However, the refundable portion is and will increase from $1,400 to $1,500 for 2022.

In 2021 the child tax credit was $3,600/$3,000 (for incomes under 150k). The Build Back Better bill that is currently in Congress would have increased 2022 numbers to match 2021. But as of this writing, Congress has not passed the bil.

What this means for you:

Taxpayers who made less than 150k, and have child(ren), may see significant decrease in their refunds

2022 Annual Exclusion for Gifts

For 2022, the first $16,000 of gifts to any person are excluded from tax, up from $15,000.

For gifts from US taxpayers to their non-US-citizen spouses, the exclusion is increased to $164,000, up from $159,000.

What this means for you:

You can give more gifts to non-spouses and your non-US spouse without having to pay the gift tax. (For anyone interested, I can provide you my Venmo! -just kidding)

Lifetime Learning Credit Limit Increased

The IRS increased the limit from around $69,000 AGI to $90,000 for single filers. If you are going to school, see if you qualify. The IRS states that The lifetime learning credit (LLC) is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution.”

What this means for you:

More people will be eligible to get a deduction for education expenses paid.

Mileage Rates Increased

The IRS reimbursement rate for mileage increased from 56 cents to 58.5 cents a mile

What this means for you:

If your employer reimburses you for mileage, the amount will increase. If you reimburse employees or contractors your costs will increase. If you drive your personal vehicle for business purposes, you may see a higher deduction.

Venmo Tax Tracking

As of January 1, 2022, Venmo and other similar apps like Cash App and Zelle (PayPal was already doing this) will be required to track their users’ transactions and determine which are related to a business. If that total is over $600, they will be sending you (and the IRS) a 1099 form. You will receive this form in early 2023.

What this means for you:

Venmo hasn’t said how they will know what is a business payment and what isn’t. Stay tuned for more from Venmo on this. Here are the Venmo 2022 Tax FAQs, that explains this topic in additional details.

How to Keep Up - Your Next Best Steps

Congress and the IRS have made thousands of changes to the tax code over the years.

And President Biden and Congress are working on more changes right now that will definitely affect you in the future.

It is almost impossible for anyone to keep up with the changes unless you do it full time.

And that is precisely what we do at CE Accounting.

We keep up with all the changes so you can spend time doing what you do best – running your business.

​​ At CE Accounting, we don’t just file forms and crunch numbers. We analyze your business and your business goals to minimize your tax obligations. 

We help your business grow and thrive.

We are in the Washington DC metro area and have clients locally and nationwide.

Call today and let us show you your next best steps for minimizing your taxes.

“This article is not intended to give, and should not be relied upon for, legal tax advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of a qualified professional.”