Higher tax brackets and a larger standard deduction in 2022 may offer some relief for taxpayers who are seeing their budgets busted by inflation. The IRS has announced new standard deductions and new tax brackets for 2022, reflecting higher price levels thanks in part to inflation.
Top Tax Bracket for 2022
While the top federal tax rate remains at 37% for 2022 (as of writing this post), less of your income will likely get hit by this tax rate. Married couples filing jointly will not enter the 37% tax bracket until their taxable income passes $647,850 for 2022. This is almost a $20,000 jump from the tax brackets in 2021. For those who were wondering, this is not some gift from Congress or the IRS. Rather, there are automatic changes each year to tax brackets based on inflation.
Individual taxpayers will enter the top federal tax bracket with incomes of $539,900. Most tax brackets increase by roughly 3% from the tax year 2022. These increases to federal tax brackets are the largest increases in four years. Tax brackets and the tax code’s formula to handle inflation were adjusted by the Tax Cut and Jobs Act of 2017.
Could These Brackets Change Again for 2022?
While the newly announced tax brackets are good news for taxpayers, don’t go out and buy a new car with your savings. (That is assuming you could find a car to buy). Congress can still make further adjustments to the tax brackets for 2022. There are quite a few tax proposals calling for increased taxes on those making more than $400,000 (single) or $450,000 married filing jointly. The pesky marriage penalty continues to cause tax turmoil for couples.
New Standard Deduction for 2022
The most common tax deduction for the average taxpayer is the standard deduction. For married couples, this valuable tax break will be increased by $800. While not life-changing, every bit helps. The new standard deduction for married couples in 2022 will be $25,900. Likewise, the maximum contribution to a flexible spending account (FSA) for healthcare has increased to $2,850, up from $2,750 in 2021.
The standard deduction will be $12,950 for single tax filers.
New 401(k) Contribution Limits for 2022
Those looking to further reduce their tax liabilities in 2022 will be allowed to make larger 401(k) contributions. The new maximum employee contribution to a 401(k) plan will be $20,500. The maximum contribution between employee and employer has increased to $61,000 per year. For taxpayers who are 50 or older, an additional $6,500 catch-up contribution is allowed bringing the grand total to $67,500 for 2022.
Setting up a solo 401(k) combined with a Cash Balance Plan can be an excellent way for high-income business owners to minimize their tax bills and plan for a secure retirement. Maximum contributions to the small business retirement plan combination of a 401(k) plus Cash Balance Plan could easily approach $300,000 per year or more if both spouses work in the business.
IRA Contribution Limits Stay the Same Yet Again
For yet another year, the IRA and Roth IRA contribution limits remain unchanged. For 2022, the IRA contribution limit is just $6,000. Similarly, the IRA catch-up contribution limit will remain a measly $1,000 for those age 50 and older in 2022.
Work with your fiduciary financial planner and tax pro to make sure you are being proactive with your tax planning. The higher your income, the more valuable tax planning guidance can be. While the new higher tax brackets may help lower your taxes, there are many tax-planning moves available to help you reach your financial goals faster and easier.
Just keep in mind, when you ignore tax planning, it is like leaving a giant tip for the IRS.