By: Joseph Moukhliss, EA
The Internal Revenue Service recently announced its annual inflation adjustments for tax year 2022 and many tax provisions have increased as a result. In today’s post, we’ll get you up to speed on the increased deductions and credits available in 2022. Inflation is usually a bad word, but in some cases it can be good. So today, let’s explore the good inflation that we all like to hear about, increases in tax deductions and credits. Let’s get at it!
Revenue Procedure 2021-45 explains the recent annual adjustments. Many amounts, however, will increase for inflation in 2022. The Standard Deduction will increase by $800 to $25,900 for married individuals filing joint returns or surviving spouses, $600 to $19,400 for heads of household, and $400 to $12,950 for unmarried individuals (other than surviving spouses) and married individuals filing separate returns. That’s a good start, but there are other areas impacted by the inflation adjustments.
The maximum Adoption Credit will increase to $14,890 up from $14,440 in 2021. That is also the maximum amount that will be excludable from an employee’s gross income for qualified amounts paid or expenses incurred by an employer under an adoption-assistance program.
The maximum Sec. 179 amount will be $1,080,000, with a phaseout threshold for amounts that exceed $2,700,000, a modest increase from 2021.
The Qualified Business Income threshold will increase to $340,100 (with the Phase-in range amount of $440,100) for married individuals filing joint returns and to $170,050 (with the Phase-in range amount of $220,050) for married individuals filing separate returns, single individuals, and heads of household, all increased from 2021.
The Foreign Earned Income Exclusion amount will increase to $112,000 from $108,700 in 2021.
The basic exclusion amount for determining the unified credit against estate tax will be $12,060,000 for decedents dying in calendar year 2022, up from $11,700,000 in 2021. The Annual Gift Tax exclusion amount will increase to $16,000 and the gift tax annual exclusion for gifts of a present interest to a spouse who is not a U.S. citizen will increase to $164,000 in 2022 from $159,000 in 2021.
The 2022 Alternative Minimum Tax exemption is $75,900 and begins to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption begins to phase out at $1,079,800). The 2021 exemption amount was $73,600 and phased out at $523,600 ($114,600, for married couples filing jointly for whom the exemption phased out at $1,047,200).
The maximum Earned Income Credit amount will be $6,935 for qualifying taxpayers with three or more qualifying children. That’s an increase from $6,728 for tax year 2021. The revenue procedure contains a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,850, up $100 from the limit for 2021.
For participants with self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,450, an increase of $50 from tax year 2021; but not more than $3,700, an increase of $100 from tax year 2021. For self-only coverage, the maximum out-of-pocket expense amount is $4,950, up $100 from 2021. For tax year 2022, for participants with family coverage, the floor for the annual deductible is $4,950, up from $4,800 in 2021; however, the deductible cannot be more than $7,400, up $250 from the limit for tax year 2021. For family coverage, the out-of-pocket expense limit is $9,050 for tax year 2022, an increase of $300 from tax year 2021.
For tax year 2022, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $160,000 for joint returns, up from $139,000 for tax year 2021.
Various penalty amounts for failure to file tax and information returns or furnish payee statements are also being adjusted for inflation for 2022.
All these changes can be quite confusing. Knowing which ones apply to you can be even more daunting. However, there are some adjustments that may benefit you from a tax perspective. The Tax Warriors® at Drucker & Scaccetti are already on the case for our clients, as we visit year-end planning to better position them for 2022 and beyond. If you have questions about previous planning conducted by your current tax advisor, we are happy discuss with you. Contact us to arrange a consultation to discuss and review your previous returns and current tax strategy.