Kicking off the news cycle surrounding tax laws was the announcements made by the IRS regarding higher federal income tax brackets for 2022, owing to the rising inflation numbers. Aside from increased tax brackets, the IRS announced higher standard deductions for 2020 as well. Other provisions have remained unchanged, however, which could lead to higher tax bills over time.
The consumer price index also saw the biggest hike in three decades, jumping by 6.2% in October 2021. This despite the fixed provisions could squeeze tax filers out of a lot of money in taxes, resulting in their purchasing power gradually declining. The IRS also boosted the income thresholds for each tax bracket to match the price hikes. These changes will apply to the tax year 2022 wherein the returns are filed in 2023.
The following brackets will explain how much an individual will pay in federal taxes based on a specific potion of their income after taking deductions and credits out of the equation.
Tax Brackets for the Year 2022 (Single Individuals)
|
Taxable Income |
Taxes Owned |
|
$0 to $10,275 |
10% of taxable income |
|
$10,276 to $41775 |
$1027.50 + 12% of amount over $10275 |
|
$41776 to $ 89075 |
$4807.50+22% of amount over $41775 |
|
$89076 to $170050 |
$15213.50+24% of amount over $89075 |
|
$170050 to $215950 |
$34647.50+32% of amount over $170,050 |
|
$215,951 to $539,900 |
$4933550 + 35% of amount over $215950 |
|
$539,901 and more |
$162718 +37% of amount over $539,900 |
Like we mentioned before, the standard deductions will also rise alongside tax brackets. For single filers, the deductions will rise to $12950 whereas for married couples the deductions will rise to $25900.
There were other adjustments made by the IRS amidst the rising inflation. Some changes were made to alternative minimum tax, estate tax exemptions were increased and a parallel system for higher earners was introduced.
Furthermore, the earned income tax credit was boosted, spending account limits are now highly flexible and write-off privilege was granted for families with low-to-moderate income. Last week’s announcement also hints at workers saving more to 401 (k) plans in the coming year. However, it is important to note that individual retirement accounts won’t have higher limits.
The Potential Tax Cuts Proposed in the Build Back Better Plan
The other top news doing the rounds this week was surrounding the latest version of the Build Back Better Plan introduced by House Democrats. If signed into law by President Joe Biden, then almost all income groups in the country could see their tax bills drop substantially in 2022. According to the report published by the Urban Bookings Tax Policy Center, the bottom 80% of households in America could potentially save at least $700 to $830 on their tax bills by next year if you take individual income tax and payroll tax changes into account.
On contrary, the top 1% of households with higher earnings could end up paying $55000 more in taxes by 2022. Additionally, those making $4 million or more in the year will have to pay $585000 more.
Suffice to say, if the bill passes, a majority of middle or low-income households in the USA could very well pay $100 or less, on average, in taxes in 2022.