IRS says it's boosting tax brackets due to faster inflation
The IRS said the income thresholds for federal tax brackets will be higher in 2022, reflecting the faster pace of inflation. That means a married couple will need to earn almost $20,000 more next year to enter the top tax bracket, with the tax rate set to remain at 37%.
The tax agency typically adjusts tax brackets each year to account for rising consumer prices, but this year's increases are greater than usual. What's not changing are the basic income tax rates that were set by Congress under the 2017 Tax Cuts and Jobs Act, which set the lowest threshold at 10% and the highest at 37%.
The IRS said it is adjusting other thresholds to reflect inflation, such as the standard deduction for married couples, which will rise 3.2% to $25,900 next year. Even so, that increase won't match the pace of inflation, which has accelerated this year due to supply-chain snarls, labor shortages and other issues.
Consumer prices increased 6.2% in October from the year-ago period, faster than their 5.4% increase the previous month, the Bureau of Labor Statistics said Wednesday. That's taking a bite out of household budgets and reducing their purchasing power, with families paying more for everything from gasoline to food.
The IRS adjusts about 60 tax provisions each year "to prevent what is called 'bracket creep'," noted Erica York of the Tax Foundation in a blog post about the changes. "Bracket creep occurs when people are pushed into higher income tax brackets or have reduced value from credits and deductions due to inflation, instead of any increase in real income."
Overall, the new tax bracket income thresholds represent increases of about 3%. In the prior year, the increases were closer to 1%. Here are the new thresholds for the nation's seven tax brackets in 2022.
- 10% tax bracket: single individuals earning up to $10,275 and married couples filing jointly earning up to $20,550.
- 12% tax bracket: single filers earning more than $10,275 and married couples filing jointly earning over $20,550.
- 22% tax bracket: single filers earning more than $41,775 and married couples filing jointly earning over $83,550.
- 24% tax bracket: single filers earning more than $89,075 and married couples filing jointly earning over $178,150.
- 32% tax bracket: single filers earning more than $170,050 and married couples filing jointly earning over $340,100.
- 35% tax bracket: single filers earning more than $215,950 and married couples filing jointly earning over $431,900.
- 37% tax bracket: single filers earning more than $539,900 and married couples filing jointly earning over $647,850.
The IRS said the personal exemption will remain at $0, the same as in 2021; the personal exemption was eliminated in the Tax Cuts and Jobs Act.
The agency said it's also boosting the standard deduction to account for inflation. Next year, it will increase to $25,900, or $800 higher than in the current tax year, for married couples. The standard deduction will increase to $12,950, or a boost of $400, for single taxpayers, the agency said.
Other changes: Higher FSA limit, 401(k) totals
The IRS said some other limits are also going higher for the next tax year.
Employees will be able to sock away up to $2,850 in their flexible spending accounts for health expenses, or an increase of $100 from the 2021 maximum. But because the IRS announced the expanded amount on November 10, some companies may have already closed their open-enrollment periods for 2022 employee benefits, which means some workers may not have been able to tap into the higher limit.
The maximum Earned Income Tax Credit will also get a boost next year, rising to $6,935 for qualifying taxpayers with at least three children, an increase of more than $200 from the current tax year.
The changes come after the IRS earlier this month said workers can stash an extra $1,000 in their 401(k)s. Next year, the contribution limit for 401(k)s, 403(b)s and most 457 plans will increase to $20,500 from $19,500 in 2021.
However, the amount that people can contribute to IRAs is remaining the same next year, at $6,000. The tax agency also said that the catch-up contribution for people over 50 years old is also remaining at $1,000, since it's not subject to an annual cost-of-living increase.
But more higher-income earners may be able to contribute to a Roth IRA in 2022, since the IRS said the income phase-out range for taxpayers making contributions to a Roth IRA will be higher, ranging from $129,00 to $144,000 for single taxpayers in 2022.
In the current tax year, the phase-out range for Roth IRAs was $125,000 to $140,000. Likewise, the income phaseout range for married couples and head of household filers will also get a boost.
The Roth IRA was designed more than two decades ago as a way for middle-class workers to set aside money for retirement. It allows people to save money on an after-tax basis, then let it grow tax-free until they retired, when they could make withdrawals without owing taxes. That's valuable for people who expect to be in a higher tax bracket by the time they retire.