Welcome to the topic Income Tax Law Changes 2022: What You Need to Know.
Changes have been made to the laws regarding Income Taxes, which will be effective from the year 2022. In this post, we’ll give you a run-down of what you need to know about all these changes and how they may affect you.
What Is an Income Tax?
Income tax is a sort of tax imposed by governments on income made by enterprises and persons within their jurisdiction. Taxpayers are required by law to file an income tax return each year in order to establish their tax obligations.
Governments rely on income taxes to fund their operations. They’re used to pay for government obligations, support public services, and give commodities to citizens.
Summary Of Some Changes
To reach the top tax bracket of 37 percent, a married couple will need to earn about $20,000 more in 2022 under the revised standards.
The standard deduction will also be increased by the IRS to $25,900 for married couples and $12,950 for single taxpayers.
Additional changes include increased contribution limits for 401(k), 403(b), and many 457 plans, as well as increases to employer-sponsored Flexible Spending Accounts for health expenses.
In the calendar year 2022, the annual gift tax deduction will increase from $15,000 to $16,000.
Retirement Plans
For 2022, the income thresholds for making deductible contributions to regular Individual Retirement Arrangements (IRAs), contributing to Roth IRAs, and claiming the Saver’s Credit have all been raised.
If you meet certain criteria, you can deduct contributions to a traditional IRA. Based on the taxpayer’s filing status and income, the deduction may be reduced or phased out until it is abolished if the taxpayer or the taxpayer’s spouse was covered by a retirement plan at work during the year.
The phase-out of the deduction does not occur if neither the taxpayer nor the spouse is covered by a workplace retirement plan. The following are the 2022 phase-out ranges:
The phase-out range for single taxpayers covered by a workplace retirement plan has been extended to $68,000 to $78,000, up from $66,000 to $76,000 previously.
If the spouse making the IRA contribution is covered by an employment retirement plan, the phase-out range is extended to $109,000 to $129,000, up from $105,000 to $125,000 for married couples filing jointly.
The phase-out range for an IRA contributor who is not protected by an employer retirement plan but is married to someone who is increased to $204,000 to $214,000, up from $198,000 to $208,000 before.
The phase-out range for a married individual filing a separate return who is covered by a workplace retirement plan is $0 to $10,000 and is not entitled to an annual cost-of-living adjustment.
The income phase-out range for taxpayers making Roth IRA contributions has been raised from $125,000 to $140,000 to $129,000 to $144,000 for singles and heads of household. For married people filing jointly, the income phase-out level is boosted to $204,000 to $214,000, up from $198,000 to $208,000.
The phase-out range for a married person filing a separate return who contributes to a Roth IRA remains $0 to $10,000 and is not subject to an annual cost-of-living adjustment.
For low- and moderate-income workers, the income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) is $68,000 for married couples filing jointly, rise from $66,000; $51,000 for heads of household, rise from $49,500; and $34,000 for singles and married individuals filing separately, rise from $33,000.
The sum people can contribute to their SIMPLE retirement plans is raised to $14,000, up from $13,500.
Income Tax Bracket Thresholds
Individual single taxpayers with incomes of more than $539,900 ($647,850 for married couples filing jointly) will continue to pay a 37 percent top tax rate in 2022.
Other rates are 35% for incomes over $215,950, with an amount of $431,900 for married couples filing jointly.
32% for incomes over $170,050, with an amount of $340,100 for married couples filing jointly.
24% for incomes over $89,075, with an amount of $178,150 for married couples filing jointly.
22% for incomes over $41,775, with $83,550 for married couples filing jointly.
And 12% for incomes over $10,275, with $20,550 for married couples filing jointly.
For single persons with incomes of $10,275 or less ($20,550 for married couples filing jointly), the lowest rate is 10%.
EITC
For eligible taxpayers with three or more qualifying children, the highest Earned Income Tax Credit amount in 2022 is $6,935 (up from $6,728 in 2021).
A table detailing the maximum EITC sum for various categories, income thresholds, and phase-outs may be found in the revenue procedure.
Other Changes
For taxable years starting after December 31, 2020, the modified adjusted gross income level used by joint filers to compute the reduction in the Lifetime Learning Credit given in 25A(d)(2) is not adjusted for inflation.
For taxpayers with a modified adjusted gross income of more than $80,000 ($160,000 for joint returns), the Lifetime Learning Credit is phased out.
The foreign earned income exclusion for the tax year 2022 is $112,000, increased from $108,700 for tax year 2021.
The cash ceiling for employee salary reductions for contributions to health flexible spending arrangements rises to $2,850 for taxable years beginning in 2022. The maximum carryover amount for cafeteria plans that allow unused amounts to be carried over is $570, up to $20 from taxable years beginning in 2021.
Individuals, estates, and trusts with a high net worth are subject to a surcharge. A new Code Section 1A would enforce a 5% tax on modified AGI over $10 million ($5 million for married taxpayers filing separately) and $200,000 for an estate or trust, as well as a 3% tax on modified AGI over $25 million ($12.5 million for married taxpayers filing separately) and $500,000 for an estate or trust.
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