Inflation, aka increased prices on the items and services we all need and desire is bad news, right? Well, bad news and good news are usually intertwined when tax law touches reality, and inflation is no different. The Internal Revenue Service published its annual inflation adjustment to over 300 different thresholds and limitations across more than 60 tax provisions for the following year. On average, figures increased by approximately 7%. The exact increase varies with the rounding rules. The unified credit against the estate and gift tax increased to $12,920,000 for individuals, with a $1,720,000 increase for married couples, with a total of $25,840,000. For historical context, the individual increase of $860,000 is over 27% more than the 2001 total individual exemption. The annual gift exclusion increased from $16,000 to $17,000. Due to the combination of rounding rules (to the nearest $1,000) and previously low inflation, the annual gift exclusion was not adjusted for 2022. This announcement does not include changes to Individual Retirement Accounts (IRAs) or deferred compensation plans such as a 401(k) plan. However, the health flexible spending arrangement (FSA) contribution limit increased from $2,850 to $3,050, and the maximum carryover limit increased from $570 to $610. SO, there is good news from inflation; however, it can still harm the taxpayer by increasing specific penalties despite these benefits.
The personal income tax rates and long-term capital gains tax rates operate independently and differently. While individual income tax rates work on a marginal basis based on income, capital gains tax rates function categorically based on total income. As such, the first $11,000 of ordinary taxable income is taxed at 10% regardless of total income. So, whether the taxpayer is a high-net-worth individual or only has $11,000 of taxable income, their tax on the initial $11,000 will be the same. In contrast, the long-term capital gain rate for individuals depend on total income. Thus it would then be 20% high-net-worth individuals, and 0% for those who make $11,00 or less, based on total income. In other words, different taxes treat income very differently. Therefore, inflation could be quite helpful…or it could be immaterial.
The updated Personal Income Tax Table and Capital Gains Table is below:
Personal Income Tax Table
Married Filing Jointly
10% at or under
Married Filing Jointly
20% if income is over
15% if income is at or under
0% if income is at or under
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