2022 Tax Law Changes
The IRS makes changes to various tax rate schedules and income tax thresholds every year. The reason why it does some tweaking is that it helps prevent the phenomenon called “bracket creep” which pushes taxpayers into higher tax brackets. It is crucial that you learn more about the latest tax changes in 2022 to plan ahead. This post takes a close look at these changes to help you stay in the know.
Tax Rates and Tax Brackets
For the tax year 2022, there are seven different federal tax brackets as mentioned below.
The exact tax bracket that you will fall under depends on your filing status and taxable income. The IRS has bumped up the income thresholds for both filer and non-filers to account for inflation.
The standard deduction will decrease your taxable income. Single filers will have a standard deduction of $12,950, whereas, married filers will have a standard deduction of $25,900 if they file jointly. As for heads of households, they will be allowed a deduction of $19,400. As for those who are over 65 or blind, their standard deduction has increased by $1,350. In addition to this, they would have a standard deduction that is $1,650 higher if they are also unmarried.
Capital Gains Tax
Profit generated from the sale of assets is subject to capital gains tax. Short-term gains will be taxed as ordinary income in 2022, whereas, long-term gains will be subject to 0%, 15%, or 20% income tax depending on taxable income and filing status. Thus, it is clear that the IRS has increased the capital gains income threshold in 2022.
Earned Income Tax Credit
For those of you that do not know, earned income tax credit, or EITC as it is commonly known is a refundable tax credit for low income and moderate income workers. The amount that will be offered as a tax credit depends on the number of children you have and your income. However, the credit offered to persons without any children has drastically reduced in 2022. It is due to the American Plan Act that boosted tax credit in 2022 from $543 to $1,502 being discontinued.
Retirement Plan Contribution and Income Limits
The good news is that you can contribute more towards your 401(k) or IRA in 2022. But, if you or your spouse has a retirement account at work, the traditional IRA income limits would still apply.
Personal Exemption Amount
When it comes to the personal exemption amount, it is still zero in 2022. The personal exemption amount has been suspended through the tax year 2025 due to The Tax Cuts and Jobs Act which aims to balance the suspension of increased Child Tax Credit for many taxpayers and the increase in the standard deduction amount.
Get Started with Bookkeeping
Whether you are a salaried person or a business owner, you need to understand that bookkeeping is important. Let our qualified professionals help you make sense of the 2022 tax law changes.