IRS Announces Inflation Adjusted Tax Provision Changes

While the annual inflation rate of 6.2% announced recently is far from good news, it is important to understand that in some ways, the news is not all bad.  As had been widely reported, the annual benefits payable to those individuals receiving Social Security payments will see their monthly benefits increased by 5.9% for 2022.

Now the Internal Revenue Service (IRS) has announced the annual increase in certain “inflation-adjusted” income tax provisions that will apply to many individual taxpayers. These revisions are noted in IRS Revenue Procedure 2021-45.

The most important of these provisions include:

  • The standard deduction rises to $25,100 for married couples filing jointly in their 2022 returns. That’s a $300 increase. It rises to $25,900 for 2023 returns, an $800 rise.
  • For single filers and married individuals filing separately, the standard deduction in 2021 returns climbs to $12,550, a $150 increase. The following year, the deduction increases to $12,950, a $400 increase.
  • The income levels applying to each tax bracket are increasing up and down the income scale. For example, in 2021 returns, the top 37% rate applies to individuals making $523,600, or $628,300 for married couples filing jointly. In 2022 returns, the richest households face the top rate for incomes above $539,900 or $647,850 for married couples filing jointly.
  • The annual exclusion on the gift tax rises for the first time in several years. From 2018 to 2021, $15,000 was the threshold before taxes applied on gifts, according to the IRS, rises to $16,000 in 2022, with returns filed in 2023.
  • The Earned Income Tax Credit, a credit for low- and moderate-income households, also increases. For example, the maximum credit for 2021 returns of qualifying households with three or more eligible children is $6,728. The following year, households with three or more kids will receive $6,935, the IRS said. The American Rescue Plan passed in March expanded the EITC’s rules, qualifications and potential payouts, particularly for workers without children.

Potential Legislation and Changes

As TaxWatch notes, other taxes for the super-rich could also be on the horizon if the Biden administration’s social safety net bill passes. The president’s most current tax hike proposal calls for a 5% surtax on households making at least $10 million and an 8% surtax on households making above $25 million.

The 2017 Tax Cuts and Jobs Act lowered the rates on most income tax brackets with the highest rate capping at 37%.. But bear in mind that these rates, including the top rate, are due to revert to higher rates at the end of 2025 when certain provisions in the Tax Cuts and Jobs Act expire. One permanent change from the Trump-era law is the method of indexing for inflation on tax provisions, according to the Tax Policy Center.  Should the Biden legislation come to fruition, it is expected that the top marginal rate will revert to 39.6% for 2022.

Without getting ridiculously technical, the Tax Policy Center notes the [inflation] measure now being used “generally increases at a slower rate” than the previous measure, and that may mean “individuals will end up in higher tax brackets.” It also means tax credits indexed for inflation “will increase at slower rates than they would have under the old indexing system.” researchers said. Slower increases in the EITC payouts are one consequence of the changed methods on inflation indexing, per information provided by the Tax Policy Center

As always, feel free to contact your Grossman Yanak & Ford, LLP Tax Partner or Director with questions.

Bob Grossman

Bob Grossman

Bob, one of the firm’s founding partners, has over 40 years of experience in public accounting. He specializes in tax and valuation issues that affect businesses as well as their stakeholders and owners. Bob has extensive experience working with the Internal Revenue Services and also serves as an expert witness in litigation matters.

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