As the Internal Revenue Service makes inflation adjustments to certain tax provisions, many taxpayers will see added benefit come 2023 when they file for 2022, and the heads-up is giving financial advisors an opportunity to review their clients’ tax situations with the advantage of foresight.
The IRS recently dropped Revenue Procedure 2021-45, which lists more than 60 provisions that are affected by inflation adjustment, from dues paid to horticultural organizations ($178 in 2022) to the threshold for excess business loss (jumping to $270,000 for single filers, $540,000 for joint filers).
“On average, the tax adjustments were a little over 3% for these 60 provisions, and it’s meaningful in the number of items being adjusted. But there are other areas subject to different calculations,” said Mark Luscombe, JD, LLM, CPA and principal analyst at Wolters Kluwer Tax & Accounting in Chicago. “Retirement plan adjustments are based on a different factor; adjustments to business meals and travel are also based on a different calculation.”
One area that Luscombe said he thought would be particularly helpful to taxpayers is the adjustment to 401(k) plan contribution limits. “If you always do the maximum allowed, knowing the new limits can help you adjust your contribution with your employer,” he said. “And that can affect other areas [in a taxpayer’s life].”
As for the adjustments to the marginal tax rates, individuals can make a little more before being bumped into the next-higher bracket. But that may or may not be a win for taxpayers. “If your income is going up 3% and the brackets go up 3%, then you won’t see a difference,” Luscombe said. “But if your income stays steady and the bracket goes up 3%, you’re going to pay less in taxes next year.”
And of course there’s a downside to these inflation adjustments—the IRS is also adjusting what it charges in interest and penalties to also reflect inflation.
Here are the highlights from the IRS announcement:
Individual tax rates. The lowest tax rate (10%) applies to singles making $10,275 in 2022, an increase of $325 over 2021, as compared to an increase of $75 from 2020 to 2021. The beginning of the highest tax bracket (37%) starts for married couples at $647,850 for 2022, an increase of $19,550 over 2021, as compared to an increase of $6,250 from 2020 to 2021.
Standard deduction. The standard deduction for single taxpayers increases to $12,950 in 2022, an increase of $400 over 2021, as compared to an increase of $150 between 2020 and 2021. The standard deduction for joint filers increases to $25,900 in 2021, an increase of $800 over 2021, as compared to an increase of $300 between 2020 and 2021.
Estate tax unified credit. The estate tax unified credit for 2022 is $12,060,000, an increase of $360,000 over 2021, as compared to an increase of $120,000 between 2020 and 2021.