The IRS makes adjustments to key parameters in the tax code annually based on formulas set out in federal law.
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WASHINGTON–The threshold for the top federal income-tax bracket in 2022 will climb by nearly $20,000 next year for married couples, and that 37% rate will apply to income above $647,850, the Internal Revenue Service said Wednesday as it implemented automatic tax-code updates to reflect faster inflation in 2021.
For individuals, that top tax bracket will start at $539,900. Those levels and the other tax bracket break points all rose about 3% from tax year 2021 due to automatic inflation adjustments built into the tax code.
Due to increases in consumer prices, all of the tax bracket thresholds and other key tax-code parameters are rising faster than usual. This would be the largest increase in four years. Congress reset the brackets and changed the tax code’s inflation formulas in 2017.
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The changes announced Wednesday typically will affect paycheck withholding and quarterly estimated taxes during 2022 and will be reflected on tax returns filed in early 2023.
Congress can change those income levels and tax rates at any time, and Democrats discussed raising the rate and lowering the top-bracket threshold as part of President
social-spending and climate agenda.
But the current tax plans moving through the House and Senate wouldn’t change where the tax brackets are set, and they wouldn’t change the basic income-tax rates that have been in place since the 2017 tax law. The brackets apply to taxable income, or income after deductions. Democrats are still considering surtaxes that would apply only on adjusted gross income above $10 million.
The inflation adjustments released Wednesday also affect dozens of other key parameters in the tax code, from the tax credit for adoption to the rules for people who expatriate. The IRS makes adjustments to these figures annually based on formulas set out in federal law that are somewhat different from the headline inflation numbers. Consumer prices rose 6.2% in October, from a year earlier, the Labor Department said Wednesday, the largest annual increase since 1990.
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The standard deduction for married couples will be $25,900, up from $25,100. The maximum amount that can be set aside in a healthcare flexible spending account will be $2,850, up from $2,750.
The exclusion from estate and gift taxes will be $12.06 million per person, up from $11.7 million. Democrats had discussed cutting that exclusion to about $6 million but have since dropped that provision from their legislation.
The annual exclusion for gifts will be $16,000, up from $15,000. That is the amount that each person can give another person without using up any of the lifetime exclusion from estate and gift taxes.
The IRS had previously released inflation adjustments for maximum contributions to 401(k) plans and other retirement accounts.
Some numbers in the tax code aren’t automatically tied to inflation and won’t adjust unless Congress changes them. Those include the $3,000 deduction for capital losses against ordinary income, the $2,000 base level for the child tax credit and the $10,000 cap on the state and local tax deduction.
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Appeared in the November 11, 2021, print edition as ‘Higher Tax Brackets To Reflect Price Rise.’