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Tax benefit thresholds rise with inflation adjustments

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Tax Hot Topics newsletter The IRS has announced its annual cost-of-living and inflations adjustments for 2022, increasing the amount that taxpayers can contribute to retirement accounts and pass on to heirs tax-free. The IRS is required to adjust the dollar amounts of dozens of tax provisions each year to account for inflation. The IRS announced the adjustments in a pair of releases: Notice 2021-61 for pension plan and retirement account limits and Rev. Proc. 2021-45 for most other items in the code.

The IRS earlier in the year issued Rev. Proc. 2021-25 to announce inflation adjustments for health savings accounts (HSAs) and health reimbursement arrangements (HRAs) for calendar year 2022, while the Social Security Administration announced an increase in the wage cap on Social Security taxes from $142,800 to $147,000.

Per Rev. Proc. 2021-45, individual income tax bracket ranges for 2022 will be raised slightly more than 3% from 2021 brackets.

In addition, the standard deduction for 2022 will be as follows:

  • $12,950 for single taxpayers and married individuals filing separately (up $400 from 2021)
  • $19,400 for heads of households (up $600 from 2021)
  • $25,900 for married couples filing jointly (up $800 from 2021)

Additional updates include these provisions:

  • Estates of decedents who die during 2022 have a basic exclusion amount of $12,060,000 (up from $11,700,000 for estates of decedents who died in 2021).
  • The annual exclusion for gifts will be $16,000 (up from $15,000 in 2021).
  • The Alternative Minimum Tax exemption amount will be $75,900 and will begin to phase out at $539,900 (up from 73,600 and $523,600, respectively, in 2021). The exemption amount will be $118,100 for married couples filing jointly and will begin to phase out at $1,079,800 (up from $114,600 and $1,047,200, respectively, in 2021).
  • The foreign earned income exclusion will be $112,000 (up from $108,700 for tax year 2021).

Notable adjustments to retirement plan limits include:

  • 401(k) Plans: The employee elective deferral limit for 401(k) plans and other retirement accounts (including Roth 401(k) plans) will be $20,500 (up from $19,500 in 2021). The limit for catch-up contributions for individuals 50 and older remains unchanged at $6,500.
  • Defined contribution plans: The limit for total employee and employer contributions to defined contribution plans will be $61,000 (up from $58,000 in 2021).
  • Defined benefit plans: The limit on annual benefits from a defined benefit plan will be $245,000 (up from $230,000 in 2021).
  • Compensation limits: The annual compensation limit for certain tax-favored retirement plans will be $305,000 (up from $290,000 in 2021).
  • Individual Retirement Accounts (IRAs): The deductible amount for contributions to an IRA remains unchanged at $6,000 in 2022. The limit for catch-up contributions to an IRA for individuals 50 and older is not subject to cost-of-living increases, and therefore remains unchanged at $1,000. The adjusted gross income (AGI) phase-out range for deductibility of IRA contributions for individuals who participate in an employer retirement plan will be increased to between $68,000 and $78,000 for singles (up from between $66,000 and $76,000 in 2021), and to between $109,000 and $129,000 for joint filers (up from between $105,000 and $125,000 in 2021). The AGI phase-out range for contributions to a Roth IRA will be increased to between $129,000 and $144,000 for singles (up from between $125,000 and $140,000 in 2021), and to between $204,000 and 214,000 for joint filers (up from between $198,000 and $208,000 in 2021).

The annual HSA limits under Section 223(b)(2) for 2022 will be $3,650 for self-only coverage (up from $3,600 in 2021) and $7,300 from family coverage (up from $7,200 in 2021). See our previous story for more information on these adjustments.

Contact:
Dustin Stamper
Managing Director
Washington National Tax Office
T +1 202 861 4144

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