Did you know that the Internal Revenue Service (IRS) analyzes and then tweaks 60+ provisions to manage inflation and bracket creep? But, what does it mean? Well, it occurs when people reach higher income tax brackets or get reduced value from deductions and credits without any increase in real income. 

Before 2018, the Consumer Price Index (CPI) was used to measure and analyze inflation. However, with tax cuts and other issues, the IRS is now dependent on the Chained Consumer Price Index (C-CPI). 

This method is used to adjust income thresholds, manage deduction amounts, and calculate credit values. All these accounting terms may feel a bit overwhelming. But, with your team of accountants and good online accounting software, all things can be managed smoothly. 

This article will detail the new inflation adjustments for the tax year 2022 and for which taxes will be filed in early 2023. Even if you are low on the budget, we will suggest taking the help of free accounting software for business to get your taxes right. 

Let’s know more about income tax brackets and rates.

2022 income tax brackets and rates

In 2022, the IRS will adjust the tax bracket for all income limits. There will be 7 tax rates in 2022, including 

  1. 10% 
  2. 12% 
  3. 22%
  4. 24%
  5. 32% 
  6. 35% 
  7. 37%

The top slab of 37% will be for taxpayers with income above $539,900 for single filers, and for married couples filing jointly, it would be $647,850. 

What does alternative minimum tax (AMT) imply?  

Created in the 1960s, AMT cautiously prevents high-income taxpayers from wading taxes. Thus, this system lays down rules that require high-taxpayers to calculate their tax bill twice. First, the taxes are calculated under the regular income tax system and then again under the AMT. So, the taxpayer needs to shell out  the higher amount. 

The AMT uses another definition of taxable income called Alternative Minimum Taxable Income (AMTI). However, it also considers the low- and middle-income taxpayers and makes sure they don’t suffer losses. Thus, taxpayers can calculate the amount using free accounting software for business and exempt it from AMTI. However, this exemption is not valid for high-income taxpayers. The tax is levied at 26% and 28%. 

Exemption amount for 2022

As per the AMT exemption amount, single filers need to pay $75,900. At the same time, married couples who are filing jointly will need to pay $118,100. So, the 28% AMT rate is applicable to 

excess AMTI of $206,100 and $103,050 for all the couples filing separate returns. 

AMT exemptions lower down at 25 cents/ dollar earned once the AMTI reaches $539,900 for single filers. At the same time, the amount is at $1,079,800 for married taxpayers who will be filing jointly. 

Earned income tax credit (EITC)

This tax credit has been set at $560 for singles. It is the same for joint filers if they have no children. The maximum credit has been set at $3,733 for one child, for two children at $6,164, and $6,935 for three or plus children. 

Do you want to log mileage for taxes?

Child tax credit

The maximum child tax credit has been set at $2,000 per qualifying child and will not be adjusted for inflation. The refundable portion of the same will be adjusted for inflation and will also increase from $1,400 to $1,500 for 2022.

Long-term capital gains tax rates 

A separate tax slab is used for calculating long-term capital gains, and they are not the same used for calculating ordinary income. Free online accounting software will help you manage them with ease and keep business and personal accounts separate.  

Qualified business income deduction 

As per the act of 2017, a 20% deduction is made for pass-through businesses. The limits on the deduction for taxpayers are for income above $170,050 for joint filers in 2022 

Exclusion for gifts 

In the year 2022, the first $16,000 of gifts are not liable to taxes. Also, the exclusion has been increased from $159,000 to $164,000 for giving gifts to spouses who are not American citizens. 

Also Read: Which Business Reports Are Important for Taxation?

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Wrapping up 

We agree that was a whole lot of information to process. But, don’t worry, you don’t need to process it all. Your cloud accounting software will make it a breeze for you. So, it is time to get hold of all the accounting terms, feed them into your solutions, and let them do the work for you. If you are still looking for that perfect online accounting software that can do your taxes, then we are surely waiting for your call. But, where can we be called at? Our digits are +1-805-491-9393 or send us a mail at support@mooninvoice.com.

FAQ’s

Yes, tax brackets will change in 2022. Slabs have been adjusted for inflation and have been increased to $12,550. Luckily, your cloud accounting software will help you calculate your taxes with ease.
You can expect lower tax refunds this year as some people have balances due on their tax refund. So, it is suggested that you keep your expectations lower this year.
Tax refunds are the aftermath caused due to overpayment of taxes. All employers cut a portion of your income to cover up your taxes and submit it to the Internal Revenue Service. At the current stage, if you make less money than you did in the past, there are chances of getting a larger refund.
The U.S uses marginal tax rates as it has a progressive tax system. Thus, whenever your income increases, you only need to pay higher taxes on the portion of your income that is above the threshold for the next tax slab.