IRS Says Tax Brackets Will Be Higher In 2022 Thanks To Faster Inflation

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by Tyler Durden
Friday, Nov 12, 2021 - 06:00 PM

Thanks to faster inflation in 2021, the IRS is raising the threshold for the top federal income-tax bracket in 2022 by nearly $20,000 for married couples - bringing the top 37% rate to income above $647,850, according to the Wall Street Journal, citing a Wednesday statement by the agency.

The roughly 3% adjustment - an automatic provision built into the tax code - brings the top tax bracket for individuals to $539,900.

The standard deduction for married couples will also rise from $25,100 to $25,900, while the maximum amount able to be placed into a healthcare flexible spending account will rise from $2,750 to $2,850. Estate and gift tax exclusion will rise from $11.7 million to $12.06 million, while the annual exclusion for gifts alone will rise from $15,000 to $16,000.

The report comes as Tuesday's "shock" CPI report revealed the highest inflation since 1990, while wages are not keeping pace.

Due to increases in consumer prices, all of the tax bracket thresholds and other key tax-code parameters are rising faster than usual. This would be the largest increase in four years. Congress reset the brackets and changed the tax code’s inflation formulas in 2017.

The changes announced Wednesday typically will affect paycheck withholding and quarterly estimated taxes during 2022 and will be reflected on tax returns filed in early 2023. -WSJ

That said, Congress can alter the income levels and tax rates at will - with Democrats notably having discussed raising the tax rate while lowering the top-bracket threshold as part of the Biden admin social spending and climate agenda. Notably, however, current tax plans working their way through the House and Senate don't affect tax brackets.

According to the report, the bracket changes also affect 'dozens of other key parameters in the tax code,' including the tax credit for adoption and rules for those who expatriate.

In October, consumer prices rose 6.2% YoY according to the Labor Department.

Things that won't change unless Congress specifically changes them? The $3,000 deduction for capital losses against ordinary income, the $10,000 SALT cap, and the $2,000 base level for the child tax credit.