Inflation is the biggest headwind facing the U.S. economy for the 2022 tax year. As of July, the inflation rate hit a new 40-plus year high of 9.1%. Inflation touches every aspect of our financial lives, from our purchasing power to our job prospects. It can also impact what we owe the IRS.
Here are answers to the most common questions about how inflation affects taxes and tax debt.
Will the IRS Increase Standard Tax Deductions During Inflation?
The IRS increased standard tax deductions for 2022, but not by much, and definitely not by enough to offset the effects of inflation.
For tax year 2022, filers can deduct:
- $12,950 if single (a $400 increase from 2021)
- $19,400 if head of household (a $600 increase from 2021)
- $25,900 if married (an $800 increase from 2021)
Will the IRS Limit Itemized Tax Deductions During Inflation?
There is no limit for itemized deductions. The IRS removed the limit on itemized tax deductions with the Tax Cuts and Jobs Act in 2017. It has been in effect every year since 2018, and the IRS is keeping it for 2022.
Will the IRS Adjust Marginal Tax Rates During Inflation?
Marginal tax rates for 2022 remain the same as they were in 2021.
For example, here are the tax rates for single filers:
- 37% on income $539,900
- 35% on income between $215,900 – $539,900
- 32% on income between $170,050 – $215,900
- 24% on income between $89,075 – $170,050
- 22% on income between $41,775 – $89,075
- 12% on income between $10,275 – $41,775
- 10% on income below $10,275
Will the IRS Increase 401(k) Contribution Limits During Inflation?
One of the tax inflation adjustments announced by the IRS is that for the year 2022, taxpayers will be allowed to contribute an extra $1,000 to their 401(k) or 403(b) plan. The limit is now $20,500. The agency also hinted that another upward cost-of-living adjustment is likely on the table for next year.
Taxpayers with IRAs and Roth IRAs are still capped at $6,000 per year. The limits on contributions to these accounts did not change from 2021 to 2022.
Will the IRS Modify Collection Financial Standards Amounts for Food, Clothing, and Other Basic Living Expenses During Inflation?
Collection Financial Standards are allowances used to determine how much a delinquent taxpayer is expected to pay toward their tax debt each month. Taxpayers get allowances for food, clothing, housekeeping supplies, personal care items, and other necessities. Allowances for these items offset the taxpayer’s income and lower their expected monthly payments toward their tax debt.
Because of inflation, the IRS raised its Collection Financial Standards allowances across the board by 8% to 9% for tax year 2022.
Will My Tax Debt Increase During Inflation?
Interest on your tax debt will increase during inflation because the IRS raised interest rates for underpayments in April and July 2022. Current IRS interest rate for underpayments is 5% (up from 4% in Q2 2022 and 3% in Q1 2022/Q4 2021).
If your tax debt increases and it is too difficult to make your monthly tax debt payment due to higher costs of living, schedule a free call to see how we can help. Remember, if you simply stop making your tax debt payments, you will accrue even more penalties/interest and risk a federal tax lien or IRS levy.
Will the IRS Offer Tax Debt Relief Programs During Inflation?
Yes, you have several options for tax debt relief during inflation, including to submit an Offer in Compromise, to ask for your tax debt to be placed in Currently Not Collectible status, or to set up a monthly installment plan.
How Can Wiztax Help?
Call us today at (866) 568-4593 to learn more about how we can help, or start here to take our free online evaluation. Regardless, we promise to save you thousands in fees.
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