Inflation is inflating for tax year 2022 amounts the IRS uses to calculate tax brackets, standard deductions and a range of other tax code items, the service has announced.
Inflation, once thought to be temporary, has taken a stronger hold in the economy than many economists had predicted or feared. “Central Bankers Are Spooked by Signs That Inflation Is Lingering for Longer,” said a Bloomberg Oct. 9, 2021 headline. Then, on Nov. 10, the U.S. Labor Dept.’s Bureau of Labor Statistics announced that in October, inflation rose 6.2%. In September, inflation hit 5.4% for the month. Overall, October’s figure was inflation’s largest increase in 31 years.
Naturally, there’s political finger-pointing galore underway, with various sides, factions, and philosophies offering blame, accusations, or excuses, with reasons that include – but are not limited to - Covid-19 and election outcomes.
Politics and pandemics aside, the bare-bones reality is that the IRS has revised a number of areas within the tax code to account for inflation. In the top tax brackets, the highest individual tax rate, 37%, will affect married couples with incomes exceeding $647,850 and individual filers whose incomes are greater than $539,900, bumps of $19,550 and $16,300, respectively.
Below the top rate, the IRS’s inflation-adjusted marginal tax rates are as follows:
- 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).
Adjustments to standard deductions are affected, increasing to $25,900 – an $800 jump - for tax year 2022 for married couples filing jointly. Single taxpayers and married couples filing separately will see a $400 increase, to $12,950, and heads of households’ standard deduction is up $600, to $19,400. No limitations exist on itemized deductions, as has been the case since 2018.
A summary of other changes is available in the IRS announcement.
Though these changes were made to acknowledge inflation’s impact, they aren’t equivalent to inflation’s effect thus far; for example, inflation in September and October averaged 5.8%: the IRS adjustments overall represent about a three percent adjustment.
Given the uncertainties ahead in the economic skies, knowing how long, or how deep, inflation will cut, is a guessing game, albeit a sophisticated one.
Every situation is different. The team at Rodefer Moss will work with you to maximize your tax benefits while staying compliant with current tax law. Contact us today.