Tax Changes in 2022

By: Rupali Mundada

The most significant tax changes for individuals in the United States came into effect in 2022. The Tax Cuts and Jobs Act, enacted in late 2017, set in motion a series of individual tax rate reductions and other changes that began in 2021 will be fully phased in by 2026. However, many of those provisions are scheduled to expire after 2025, if there is further absence of Congressional action, as a result, nearly all the individual tax provisions enacted under the Tax Cuts and Jobs Act will revert back to their pre-Act levels after 2025.

In 2022, the Tax Cuts and Jobs Act will make significant changes to the tax code. The standard deduction will nearly double, while the top marginal rate will decrease from 39.6% to 37%. The child tax credit will also increase, while the personal exemption will be eliminated. These changes will impact taxpayers at all income levels, but those in higher brackets are likely to see the biggest savings.

Larger Standard Deductions:

A standard deduction is a specific amount you are allowed to deduct from your income that is annually adjusted for inflation. The amount depends on the following factors: your age, filing status and if any other person can list you as a dependent. 

The standard deduction for married couples filing jointly increased $800 to $25,900, for 2022. For single tax payers, it went up $400 to $12,950. Also, the standard deduction increased for taxpayers using the head of household filing status (i.e., single parents) to $19,400, an increase of $600 from 2021.

Capital Gains:

The tax rate on capital gains is less than the tax rate on ordinary income. Yet, they depend on the taxpayer's filing status and taxable income.

The maximum adjusted capital gains rates are applicable to both the alternative minimum tax and the regular income tax.

The capital gains rate is 0% for 2022 if your income does not exceed:-

  • $83,350 for married couples filing jointly
  • $41,675 for married couples filing separately
  • $55,800 for the head of a household
  • $41,675 for single filers

The 15% rate is applied to the following adjusted net capital gains for the 2022 tax year:-

  • Maximum joint returns of $517,200
  • Up to $258,600 in separate returns from married people
  • Up to $488,500 in returns for the head of the household
  • Single individual returns up to $459,750

For any income amounts beyond these caps, the appropriate capital gains rate is 20%.

Individual Tax Credits

Earned Income Tax Credit (EITC):

For taxpayers with self-reported incomes in the lowest income group, the maximum earned income tax credit (EITC) amount as well as the taxable income limits, for its thresholds and ceilings is also adjusted for inflation. In the tax year 2022, the maximum credit for families with three or more children is $6,935. The phaseout of the credit for married couples filing jointly starts at an adjusted gross income of $26,260. (or earned income, if higher). At $59,187, the credit is fully completed.

If the total investment income for the 2022 tax year exceeds $10,300, including income from interest, dividends, net capital gains, and other passive activities, no EITC is permitted.

Child Tax Credit:

The Child Tax Credit was altered for 2021 by President Biden's American Rescue Plan, which raised the credit's maximum amount to $3,000 per kid ($3,600 for children under the age of six) and raised the minimum age requirement from 16 to 17 years for children to qualify.

The child tax credit is $2,000 for each dependent child under the age of 17 claimed on your return for 2022. In general, the child must live with you for at least six months out of the year and must be in your relation.

They also need a Social Security Number and to be an American citizen, national, or resident alien. The child's name, date of birth and Social Security Number must also be included on your tax return.

Your 2022 modified adjusted gross income (AGI) must not exceed $400,000 for a combined return or $200,000 for a single or head-of-household return before the credit starts to phase out. For tax years 2022 and after, the child tax credit returns to its pre-2021 regulations, fixing it to $2,000 for the year 2022.

Qualified Adoption Expenses:

For 2022, the credit for permissible adoption costs and the additional credit for adopting a child with special needs amount to $14,890. Qualified adoption expenditures paid for or reimbursed by an employer plan will be increased to the equivalent amount of exclusion from an employee's income.

Exclusion of Foreign Earned Income:

The IRS has set the overseas earned income exclusion at $112,000 for the tax year 2022.

Alternative Minimum Income:

The alternative minimum tax (AMT) is imposed on alternative minimum taxable income that exceeds an exemption threshold, such as normal taxable income that has certain tax benefits subtracted.

The following are the amounts of the alternative minimum tax exemption for the 2022 tax year:

  • 118,100 $ for joint returns;
  • 75,900 $ for single people;
  • 59,050 $ for married individuals' separate returns.

In 2022, the following alternative minimum tax exemption levels phase out:-

  • $1,079,800 to $1,552,200 for joint returns;
  • $539,900 to $843,500 for single people;
  • $539,900 to $776,100 for separate returns for married persons.

Retirement Benefits:

Retirement plan contributions and phaseout ranges are also subject to restrictions set by the IRS. For the 2022 tax year, filed in 2023, the income exclusion for employee contributions to workplace retirement plans, such as 401(k)s, 403(b)s, 457 plans, and the federal government's Thrift Savings Plan, is $20,500.

For employees aged 50 years and above, the catch-up contribution is $6,500. For 2022, there is a $14,000 cap on SIMPLE (Savings Incentive Match Plan for Employees) retirement plan contributions.

Individual Retirement Accounts (IRAs):

Individual retirement account (IRA) contributions are tax deductible up to $6,000 in 2022. Each year, individuals aged 50 years and above are permitted to pay an additional $1,000.

However, the phaseout thresholds for the deduction are raised. The deduction may be diminished or phased out until it is abolished if a taxpayer or their spouse participates in an employment retirement plan throughout the year.

For the tax year 2022, the phaseout ranges are:

The deduction phaseout for adjusted gross incomes for people who actively participate in an employment retirement plan is $68,000-$78,000 for single people and heads of households, and $109,000-$129,000 for joint returns.

The phaseout ranges from $204,000 to $214,000 for an IRA contributor who is not an active participant in another plan but whose spouse is.

There is no modification made for married active contributors filing separate returns, and the phaseout range stays at $0 to $10,000.

The proposed changes to taxes for the year 2022 are ambitious and far reaching. It is important to be familiar with these new laws so that you can be prepared for any shifts in taxation that may affect your financial planning. While there is no guarantee of how the markets will react, it is likely that some of these changes will bring some relief to individuals and businesses alike. Ultimately, by being informed about the upcoming tax changes we can ensure a smoother transition into the next tax year.


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