The Internal Revenue Service (IRS) updates tax rates, allowances, and thresholds every year. These figures are applicable to the tax law provisions that are adjusted annually for inflation. The top tax rate will continue to be 37% for returns filed by individual taxpayers for the 2021 and 2022 tax years, but the standard deduction, tax bracket ranges, other deductions, and phase-outs will increase.
Key Takeaways
- The IRS updates tax rates, allowances, and thresholds every year by adjusting them for inflation.
- You can claim a standard deduction to reduce your taxable income as well as an additional deduction if you are over 65 and/or blind.
- Tax brackets range between 10% and 37%.
- There are a number of different individual tax credits, including the earned income credit and qualified adoption expenses.
- Retirement contributions have limits and can help you reduce your taxable income.
Standard Deduction
The standard deduction is a specific figure that taxpayers can use to reduce their taxable income when they file their annual tax returns.
2021 Standard Deductions
The deduction set by the IRS for 2021 is:
- $12,550 for single filers
- $12,550 for married couples filing separately
- $18,800 for heads of households
- $25,100 for married couples filing jointly
- $25,100 for surviving spouses
The additional standard deduction for an aged individual or for someone who is blind is $1,350. The amount is $1,700 if the individual is unmarried and not a surviving spouse. If you’re claiming someone as a dependent on your tax return, the standard deduction cannot exceed $1,100 or $350 plus the individual’s earned income (as long as it’s not over $12,550)—whichever is greater.
2022 Standard Deductions
The deduction set by the IRS for 2022 is:
- $12,950 for single filers
- $12,950 for married couples filing separately
- $19,400 for heads of households
- $25,900 for married couples filing jointly
- $25,900 for surviving spouses
The additional standard deduction amount for an individual who is aged or blind is set at $1,400. That amount increases to $1,750 for individuals who are unmarried and if they aren’t surviving spouses. The standard deduction for claiming a dependent is $1,150 or $400 plus the individual’s earned income (as long as it’s not over $12,950)—whichever is greater.
Tax Rates and Brackets
As noted above, the top tax bracket remains at 37%. The other tax brackets set by the IRS are 10%, 12%, 22%, 24%, 32%, and 35%. This means the highest earners fall into the 37% range while those who earn the least are in the 10% bracket.
The tax rates and brackets for 2021 and 2022 are provided in the following two charts.
There is no longer a personal exemption due to the 2017 Tax Cuts and Jobs Act. Taxpayers whose net investment income exceeds the IRS limit ($200,000 for an individual taxpayer, $250,000 married filing jointly, or $150,000 married filing separately) are subject to a 3.8% net investment income tax (NIIT) on investment income above those limits.
Capital Gains
Capital gains rates are lower than a taxpayer’s ordinary income rate. But they depend on the taxpayer’s taxable income and filing status. The maximum adjusted capital gains rates apply for both the regular income tax and the alternative minimum tax (AMT).
The maximum zero rate amount on adjusted net capital gains for 2021 for married persons was $80,800 for joint returns and $40,400 for married individuals’ separate returns. The rate for the head of a household was $54,100 and $40,400 for single individual returns.
These amounts increase for the 2022 tax year as follows:
- $83,350 for married couples filing jointly
- $41,675 for married couples filing separately
- $55,800 for the head of a household
- $41,675 for single filers
The 15% rate amount applies to adjusted net capital gains for:
- Joint returns of up to $501,600 for 2021 and $517,200 for 2022
- Married individuals’ separate returns of up to $250,800 for 2021 and $258,600 for 2022
- Head of household returns of up to $473,750 for 2021 and $488,500 for 2022
- Single individual returns of up to $445,850 for 2021 and $459,750 for 2022
The applicable capital gains rate is set at 20% for any income amounts above these ceilings.
Individual Tax Credits
Earned Income Credit (EITC)
The maximum amount of the earned income tax credit (EITC) for low-income taxpayers and the taxable income levels for its thresholds and ceilings are also adjusted for inflation. The maximum credit for three or more children is $6,728 in 2021 and $6,935 in 2022. For married couples filing jointly, the phase-out of the credit begins at $25,470 of adjusted gross income (or earned income, if higher) for 2021 and $26,260 in 2022. The credit is completed at $57,414 in 2021 and $59,187 in 2022.
No earned income credit is allowed if the aggregate amount of investment income, such as those from interest, dividends, net capital gains, or other passive activities, exceeds $10,000 and $10,300 in 2021 and 2022, respectively.
The American Rescue Plan, signed by President Biden on March 11, 2021, includes generous tax breaks to low- and moderate-income people. The age range expanded so people without children can claim the credit as of age 19, instead of 25, with the exception of certain full-time students (students between 19 and 24 with at least half a full-time course load are ineligible). The upper age limit of 65 is eliminated. For single filers, the phaseout percentage rises to 15.3%, and phaseouts increase to $11,610. The size of the earned-income tax credit also increased for childless households only for the 2021 tax year to $1,502.
Child Tax Credit
President Biden’s American Rescue Plan made changes to the Child Tax Credit for 2021. It increased to as much as $3,000 per child ($3,600 for ages 5 and under). The age limit for qualifying children also rose to 17 (from 16). The maximum refundable portion of the child credit for each child under age 17 was limited to $1,400 per child. Now, the credit is fully refundable for that amount in 2021. The amount for 2022 is $1,500.
The IRS may also issue up to half of an eligible household’s credit as an advance disbursement between July and December, using the previous year’s tax return to determine eligibility.
Eligible families who did not receive any advance Child Tax Credit payments can claim the full amount of the Child Tax Credit on their 2021 federal tax return. Families who received advance payments will need to file a 2021 tax return and compare the advance Child Tax Credit payments they received in 2021 with the amount of the Child Tax Credit they can properly claim on their 2021 tax return.
The credit is reduced to $2,000 per child if your modified adjusted gross income (MAGI) exceeds a certain limit. The limit for 2021 is:
- $150,000 for married couples filing jointly
- $112,500 for heads of household
- $75,000 for single filers
President Biden’s bill also eliminated the minimum income requirement for the Child Tax Credit. Previously, families earning less than $2,500 a year were ineligible and credits were calculated based on distance from that minimum at a rate of 15 cents per child for every dollar of income above $2,500.
This expansion of the Child Tax Credit and the monthly advance payments only apply to 2021. There is an option to receive credit as a lump sum by opting out on the IRS Child Tax Credit Update Portal. That money will come at one time when 2022 taxes are filed in the spring of 2023.
The child tax credit for tax years 2022 and onward will revert back to pre-2021 rules.
Qualified Adoption Expenses
The credit for qualified adoption expenses, as well as the special credit for the adoption of a child with special needs, amount to $14,440 for 2021 and $14,890 for 2022. The exclusion from an employee’s income for qualified adoption expenses that are paid or reimbursed under an employer plan will be increased to the same level.
Lifetime Learning Credit
The maximum $2,000 per return lifetime learning credit (LLC) for qualified educational expenses for the taxpayer, spouse, or dependent phases out between MAGI of $59,000 and $69,000 for single returns, and between $119,000 and $139,000 for joint returns, in 2021.
Foreign Earned Income Exclusion
The foreign earned income exclusion is set by the IRS at $108,700 in 2021. In 2022, this amount jumps up to $112,000.
Alternative Minimum Tax
The AMT applies to alternative minimum taxable income, such as regular taxable income with certain tax benefits added back, in excess of an exemption level.
The exemption levels for 2021 and 2022 are:
- $114,600 and $118,100 for joint returns
- $73,600 and $75,900 for unmarried individuals
- $57,300 and $59,050 for married persons’ separate returns
These exemption levels phase out between:
- $1,047,200 and $1,505,600 in 2021 and $1,079,800 and $1,552,200 in 2022 for joint returns
- $523,600 and $818,000 in 2021 and $539,900 and $843,500 in 2022 for unmarried individuals
- $523,600 and $752,800 in 2021 and $539,900 and $776,100 in 2022 for married persons’ separate returns
The AMT rate is 28% for AMTI up to a maximum AMTI of $199,900 and $206,100 for returns of married couples and single individuals for 2021 and 2022 ($99,500 and $103,050 for married filing separately).
Increased Allowances: Fringe Benefits, MSAs, and Estates
The monthly limit for qualified transportation and qualified parking fringes is set at $270 for 2021 and $280 for 2022.
The maximum salary reduction for contributions to health flexible spending accounts (FSAs) is $2,750 for 2021 and $2,850 for 2022. The maximum carryover amount of unused amounts for cafeteria plans is $550 for 2021 and $570 for 2022.
The thresholds and ceilings for participants in medical savings accounts (MSAs) are:
- Between $2,400 and $3,600 with a maximum out-of-pocket expense of $4,800 for 2021 for self-coverage
- Between $4,800 and $7,150 with a maximum out-of-pocket expense maximum for family coverage of $8,750 for 2021
- Between $2,450 and $3,700 with a maximum out-of-pocket expense of $4,950
for 2022 for self-coverage - Between $4,950 and $7,400 with a maximum out-of-pocket expense maximum for family coverage of $9,050 for 2022
For a decedent dying in 2021, the exemption level for the estate tax is set at $11.7 million. That amount increases to $12.06 million. The annual gift tax exclusion is $15,000 for 2021 and $16,000 for 2022.
Retirement Plans
The IRS also sets limitations on retirement plan contributions as well as phase-out ranges. The income exclusion for employee contributions to employer retirement plans, such as 401(k)s, 403(b)s, 457 plans, and the federal government’s Thrift Savings Plan are set at $19,500 for 2021 and $20,500 for 2022. The catch-up contribution for employees age 50 and older is $6,500 for both years. The limitation for SIMPLE retirement accounts is set at $13,500 for 2021 and $14,000 for 2022.
Individual Retirement Accounts (IRAs)
The deductible amount for individual retirement account (IRA) contributions is set at $6,000 for both 2021 and 2022. People 50 and over can contribute an additional $1,000 each year.
The phase-out levels for the deduction, though, are adjusted upwards. If either a taxpayer or their spouse is covered by a workplace retirement plan during the year, the deduction may be reduced or phased out until it is eliminated.
The phaseout ranges for 2021 are:
- If an individual is an active participant in an employer retirement plan, the deduction phase-out for adjusted gross incomes is between $66,000 and $76,000 for single individuals and heads of households, and between $105,000 and $125,000 for joint returns.
- For an IRA contributor who is not an active participant in another plan but whose spouse is an active contributor, the phaseout ranges from $198,000 to $208,000.
- For a married active contributor filing a separate return, there is no adjustment and the phaseout range will remain $0 to $10,000.
The phaseout ranges for 2022 are:
- If an individual is an active participant in an employer retirement plan, the deduction phase-out for adjusted gross incomes is between $68,000 and $78,000 for single individuals and heads of households, and between $109,000 and $129,000 for joint returns.
- For an IRA contributor who is not an active participant in another plan but whose spouse is an active contributor, the phaseout ranges from $204,000 to $214,000.
- For a married active contributor filing a separate return, there is no adjustment and the phaseout range will remain $0 to $10,000.
IRA phaseouts do not apply if neither a taxpayer nor their spouse is covered by a workplace retirement plan.
Roth IRAs
The phase-out for Roth IRA contributions is $125,000 to $140,000 for single taxpayers and heads of households and $198,000 to $208,000 for joint returns for 2021. The Roth IRA phaseout for a married individual’s separate return will continue at $0 to $10,000. The 2022 phaseout ranges are $129,000 to $144,000 for single taxpayers and heads of households and $204,000 to $214,000 for joint returns for 2022. The Roth IRA phaseout for a married individual’s separate return remains at $0 to $10,000.
Saver’s Credit
Low-income taxpayers may make contributions to 401(k), 403(b), SIMPLE, SEP, or certain 457 plans, as well as traditional and Roth IRAS, are entitled to claim a non-refundable tax credit in addition to their exclusions or deductions.
Married taxpayers filing joint returns are eligible to claim a credit for contributions of up to $4,000 at a rate of:
- 50% with adjusted gross income (AGI) up to $39,500 in 2021 and $41,000 in 2022
- 20% with AGI up to $43,000 in 2021 and $44,000 in 2022
- 10% with AGI up to $66,000 in 2021 and $68,000 in 2022
Heads of households can claim a credit for up to $2,000 of contributions at a rate of:
- 50% with AGI up to $29,625 in 2021 and $30,750 in 2022
- 20% with AGI up to $32,250 in 2021 and $33,000 in 2022
- 10% with AGI up to $49,500 in 2021 and $51,000 in 2022
All other taxpayers are eligible to claim a credit for up to $2,000 of contributions at a rate of:
- 50% with AGI up to $19,750 in 2021 and $20,500 in 2022
- 20% with AGI up to $21,500 in 2021 and $22,000 in 2022
- 10% with AGI up to $33,000 in 2021 and $34,000 in 2022