Per the federal tax code the IRS is required to adjust dozens of tax related items for inflation. Given the specter of rising inflation as evidenced in the recent 5.9% COLA increase for 2022, most are expecting the IRS to announce significant increases to federal tax bracket ranges and standard deductions for the coming year.
This could mean higher net paychecks for many as the standard deduction and tax-bracket income ranges are expected to increase around 3%, according to Wolters Kluwer and Accounting Today.
This should be especially helpful to lower and middle-income taxpayers who often get hit by tax bracket creep when they see flat or higher incomes – which should be the case given average wages are expected to increase by a similar amount in the next 12 months.
The 2022 standard deduction is expected to rise from $25,100 to nearly $25,900 (married) and to $12,900 (from $12,550) for singles. Similarly 2022 tax brackets (not tax rates) will also expand by around 3%. Because the US tax system is a progressive one, as tax bracket ranges expand more of your current income is taxed in a lower bracket.
Both these changes will act like a tax cut and should result in larger (take home) paychecks in 2022, after the IRS and payroll providers update paycheck-withholding calculations, which will result in less money being withheld for taxes.
Naturally if you get big raise or bonus next year, your taxes may go up due to you higher overall gross/taxable income. But your current or existing wages should be taxed less.
The tax related adjustment will happen automatically for most active employees but if your life situation (marriage, divorce or kids) or employer changes you may want to submit a new or updated IRS W4 form to your HR/Payroll department.
Because of higher inflation any pay raise in real terms will be quickly eaten up the higher cost of goods and services, making the gain from higher tax brackets and standard deduction savings even more important to millions of Americans.