Will Inflation Affect My Tax Return?

Inflation has reached its highest point in 40 years, at 8.5% at the end of March 2022. With such high rates, many people wonder if their taxes will be affected by inflation. The answer is yes—there is a good chance that your tax returns can be affected by inflation. 

As the IRS periodically changes the tax rules to adjust for inflation, tax planning for individuals in Buffalo Grove, IL, becomes even more critical. 

Make comprehensive tax planning and preparation a year-round priority, which can prove to be highly profitable.

Here are some inflation-related changes that could affect your tax returns. 

What is the Current Standard Deduction?

For 2022, the standard deduction for married couples filing jointly is rising to $25,900. This is an increase of $800 from 2021. 

The standard deduction will also be rising for individuals to adjust for inflation. In fact, for single couples and married individuals filing individually, the standard deduction is rising to $12,950. This is an increase of $400 from the tax year 2021. 

Heads of households will also see an increase in the standard deduction. The standard deduction for heads of households will be $19,400. This is up $600 from the previous year. 

For the tax year 2022, you can expect to see significant increases in the standard deduction, no matter your filing status. This can help you keep more money in your pocket after giving your dues to Uncle Sam. 

Alternative Minimum Tax 

The Alternative Minimum Tax is a floor on the percentage of taxes you must pay if you make above a certain threshold, regardless of how many deductions or exemptions you qualify for. The purpose of the alternative minimum tax is to prevent people with many tax breaks from not paying their fair share of taxes. 

In 2022, this exemption amount will be raised to $75,900. As a taxpayer’s income reaches $539,900, this exemption will begin to phase out. For married couples filing jointly, the Alternative Minimum Tax is $118,100, which will start to phase out at $1,079,800. 

Marginal Rates 

Just like the standard deduction, marginal rates are also changing for the tax year 2022 to adjust for inflation. Marginal rates are the taxes you pay on every next dollar of income. Here is the breakdown of marginal rates for 2022: 

• 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly)
• 35% for incomes over $215,950 ($431,900 for married couples filing jointly)
• 32% for incomes over $170,050 ($340,100 for married couples filing jointly)
• 24% for incomes over $89,075 ($178,150 for married couples filing jointly)
• 22% for incomes over $41,775 ($83,550 for married couples filing jointly)
• 12% for incomes over $10,275 ($20,550 for married couples filing jointly)
• 10% for single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly)

So, if you want to know what tax bracket you will fall into, just look at this list. See where your income drops, and you will get an obvious idea of the tax rates you can expect to pay. 

Child Tax Credit 

In 2022, changes are being made to adjust the Child Tax Credit for inflation. However, the inflation-related changes will only apply to the refundable portion of the Child Tax Credit. In 2022, the

refundable portion of the Child Tax Credit will rise from $1,400 to $1,500. The maximum Child Tax Credit will remain at $2,000 per child and will not be adjusted for inflation. 

Capital Gains 

Capital gains are the gains you make on price fluctuations of assets that you held and then sold. Capital gains tax rates are based on income and how long you hold the asset. Assets held for under 12 months are considered short-term capital gains, and assets held for over 12 months are considered long-term capital gains. 

Short-term capital gains are taxed based on ordinary income tax rates, and long-term capital gains are given a percentage based on your income. In 2022, the income amounts for long-term capital gains taxes are adjusting for inflation. 

Here are the new long-term capital gains tax rates for 2022. 

2022 Capital Gains Tax Brackets

2022 Qualified Business Income Deduction (Sec. 199A)

If you plan on making capital gains from assets like stocks, bonds, or real estate in 2022, then now you know what tax rate you can expect to pay on your long-term gains based on your income amount.

In Summary 

Inflation and the adjustments that the IRS makes to account for inflation can definitely impact your tax returns. Not only can inflation-related changes affect your income tax brackets, but they can also influence whether or not you qualify for a wide variety of deductions. Usually, when the IRS makes inflation-related adjustments, it works in favor of the taxpayer. 

For example, in 2022, you will be able to make more money while remaining in each tax bracket than in the prior year. But, to optimize your tax strategy, you need to be aware of all of the inflation-related tax changes touched on in this article. 

Next Steps

For assistance in understanding the IRS’s inflation-related changes or creating an optimal strategy to deal with these changes, we are happy to assist you. Get in touch today to plan ahead in the tax game efficiently.  

There are many benefits of working with both a CFP and a CPA. SGL Financial is here to help!

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