Taxes, taxes, taxes….everyday you hear, everything is going up because of inflation and that includes taxes.
The good news: the Internal Revenue Service (IRS) recently announced that it will be making tax inflation adjustments for the 2022 tax year.
These changes will affect the standard deduction, personal exemption, and other key elements of the tax code.
It’s imperative that taxpayers understand how this can impact their individual financial situation.
What Are Tax Inflation Adjustments?
Tax inflation adjustments are used by the Internal Revenue Service (IRS) to adjust income thresholds, tax deductions, and credits based on changes in the Consumer Price Index (CPI).
The CPI is a measure of the average change in prices that consumers pay for a basket of goods and services over time. When the CPI rises due to higher prices, the IRS adjusts certain income thresholds and tax deductions accordingly so that taxpayers don’t have to pay more taxes than necessary due to inflation.
Let’s take a look at the changes and what this means for taxpayers.
Standard Deduction Changes
Perhaps the most important change to note is the increase in the standard deduction amount for single and married filing jointly taxpayers. For single filers and married couples, it has been bumped up to $12,950 (up from $12,550). Those who are filing head of households will now see an increase to $19,400 (up from $18,800).
This means that those who qualify for these deductions can deduct a higher percentage of their income from their taxable income.
Alternative Minimum Tax
In 2022, taxpayers with income up to $75,900 are exempt from the Alternative Minimum Tax. This amount is nearly a four percent increase from last year’s exemption of $73,600 and begins its phase-out at incomes of approximately half a million dollars for single filers ($539,900) or over one million if married filing jointly ($1,079,800).
Increase In Allowable Exemptions
Another major change from 2021 is an increase in the number of allowable exemptions per taxpayer. Exemptions are claimed on Schedule A of an individual’s tax return and allow them to reduce their taxable income. The new allowable exemption amount will be $3,650 per exemption, up from the previous limit of $3,600 per exemption in 2021.
Earned Income Tax Credit
Taxpayers with three or more qualifying children are eligible to receive up to $6,935 in Earned Income Tax Credit for the 2022 tax year. This is an increase from 2021’s maximum EITC amount of $6,728. For those who don’t fall into that category there are other income thresholds and phase-outs available – see the latest revenue procedure for complete details!
These are just some of the tax inflation adjustments the IRS is making.The IRS will continue to monitor the economy and make changes as needed.
It’s always good to try and keep up with the latest tax news so you can be prepared when it comes time to file your return.
Questions or concerns? Reach out to us today! We’re here to answer any of your questions.