Doing your taxes has never been a walk in the park. But recent events have left the picture even murkier. With stimulus checks, increasing home sale values, and child tax credits, some consumers are left wondering what their tax situation will look like this year. In this article, we explore the pros and cons of tax code updates and the possible impact on consumers’ spending power.
Tax Table Adjustments Could Increase Take-Home Pay
Americans have felt the effects of inflation over the past six months. In November the inflation rate rose 6.8% from a year earlier, a nearly four-decade high. New car prices were up 11% for the same period.
The IRS is easing some of the inflationary burdens with this year’s tax tables. Many wage-earning Americans will see take-home pay increase in 2022. This is due to the inflation factor used to adjust federal tax withholding tables. It has jumped 3% for 2022 due to inflation indexing, versus last year’s 1%. This lowers the amount of taxes taken out of paychecks, increasing take-home pay.
While the increase will be nominal for most, it’s a good sign to see take-home pay increasing in this inflationary environment.
Social Security Recipients Could Gain or Lose
Because of higher inflation, Social Security benefits will increase 5.9% in 2022, the most since 1982.
However, this jump could push some recipients into higher tax brackets. The income threshold at which 85% of Social Security payments become taxable is $44,000 for joint filers and $34,000 for single filers. These numbers aren’t inflation-adjusted and have been the same since 1994.
Whether a Social Security recipient sees an income increase or a tax increase depends on how close they are to the next threshold.
Child Tax Credits Paid in Advance
The child tax credits distributed in 2021 were part of the government’s Covid relief plan. While they helped many families afford the necessities during a turbulent time, they may have a noticeable effect on this year’s tax filings. Many families received 50% of their child tax credits in advance through monthly payments. However, it’s important to realize that this 50% credit will no longer be applied to their tax filing this year; it was paid out upfront. This could leave families with either a larger bill or a smaller-than-expected return this year.
Overall, analysts expect consumer spending to remain strong in 2022. Tax season might look a little different this year, but the general consensus is that Americans are hungry for a return to normalcy – and regular spending is part of that.