A Breakdown of the Internal Revenue Code for 2022

The Internal Revenue Code (IRC) is the primary source of federal tax law in the United States, compiled as Title 26 of the United States Code. Enacted by Congress, the current version is the Internal Revenue Code of 1986, which followed major revisions of earlier codes from 1939 and 1954. This legal text provides the foundation for all federal taxation, including income, corporate, estate, and gift taxes.

The IRC should be distinguished from the Internal Revenue Service (IRS). The IRC is the law passed by Congress, while the IRS is the agency within the Department of the Treasury responsible for administering and enforcing that law. The IRS interprets the IRC through regulations and other guidance, collects taxes, and ensures taxpayer compliance.

The IRC is frequently amended by new legislation, which can result in minor adjustments or substantial reforms. This article provides an overview of the major components of the Internal Revenue Code as it existed for the 2022 tax year.

Structure of the Internal Revenue Code

The Internal Revenue Code is organized hierarchically to group related provisions. The highest level is the Subtitle, which covers broad categories of taxation. There are eleven subtitles, each designated by a letter. The most frequently referenced subtitles include Subtitle A, which covers Income Taxes, and Subtitle B, which deals with Estate and Gift Taxes. Other subtitles are Subtitle C for Employment Taxes, Subtitle D for Miscellaneous Excise Taxes, and Subtitle F, which outlines the rules for Procedure and Administration.

Below the subtitle level, the Code is divided into Chapters, Subchapters, Parts, Subparts, and Sections. This structure allows users to locate specific rules. For example, the deduction for trade or business expenses is found in Section 162, which is located within Subtitle A, Chapter 1, Subchapter B, and Part VI.

Each section is a specific statute, and its placement provides context for its application. The Code also contains a definitions section, Section 7701, which provides standardized meanings for terms used throughout the IRC to ensure consistent interpretation.

Key Provisions for Individuals in 2022

For the 2022 tax year, individual taxation began with calculating gross income, which includes all income from any source unless excluded by law. From gross income, taxpayers could subtract “above-the-line” deductions to arrive at Adjusted Gross Income (AGI). These deductions included contributions to traditional IRAs, student loan interest, and certain self-employment expenses. AGI is an important figure as it affects eligibility for various tax benefits.

After determining AGI, taxpayers reduced their taxable income by taking either the standard deduction or itemized deductions. For 2022, the standard deduction amounts were $12,950 for single filers, $25,900 for married couples filing jointly, and $19,400 for heads of household. The personal exemption remained at zero, a change from the Tax Cuts and Jobs Act of 2017.

Taxpayers could itemize if their total eligible deductions exceeded their standard deduction amount. Common itemized deductions for 2022 included state and local taxes (capped at $10,000 per household), home mortgage interest on up to $750,000 of acquisition debt, charitable contributions, and medical expenses that exceeded 7.5% of AGI.

Once taxable income was determined, it was subject to progressive marginal tax rates. For 2022, there were seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The lowest rate of 10% applied to single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly), while the top rate of 37% applied to single individuals with incomes over $539,900 ($647,850 for married couples filing jointly).

Tax liability could be reduced by tax credits, which reduce tax on a dollar-for-dollar basis. For 2022, the Child Tax Credit was worth up to $2,000 per qualifying child, with a refundable portion of up to $1,500 for certain taxpayers. The Earned Income Tax Credit (EITC), a refundable credit for low- to moderate-income individuals, had a maximum value of $6,935 for taxpayers with three or more qualifying children.

Key Provisions for Businesses in 2022

The taxation of businesses in 2022 depended on their legal structure. C corporations were subject to an entity-level federal income tax at a flat rate of 21%. This tax is paid by the corporation on its profits. When those profits are distributed to shareholders as dividends, the shareholders are then taxed again on that income, creating double taxation.

In contrast, pass-through entities, such as sole proprietorships, partnerships, and S corporations, do not pay tax at the business level. Instead, the income, losses, deductions, and credits are “passed through” to the owners. The owners then report this information on their personal returns and pay tax at their individual rates.

A provision for pass-through entities in 2022 was the Qualified Business Income (QBI) deduction under Section 199A. This allowed eligible owners to deduct up to 20% of their QBI from taxable income. For 2022, the deduction was available to taxpayers with taxable income below $170,050 for single filers or $340,100 for joint filers. For those with income above these thresholds, the deduction could be limited based on the business type, W-2 wages paid, and the basis of qualified property.

Under Section 179, businesses could elect to expense the full purchase price of qualifying equipment and software up to a limit. For 2022, the maximum Section 179 deduction was $1,080,000. This deduction was phased out for businesses that spent more than $2,700,000 on new and used equipment. In addition, businesses could use 100% bonus depreciation for qualifying property placed in service during 2022, allowing for the immediate deduction of the entire cost of eligible assets. Common business tax credits included the Research and Development (R&D) credit.

Estate, Gift, and Trust Taxation in 2022

Subtitle B of the Internal Revenue Code governs the taxation of wealth transfers, including the federal estate tax, gift tax, and generation-skipping transfer (GST) tax. These three taxes are unified and share a single lifetime exemption amount. For 2022, the unified credit provided an exemption of $12.06 million per individual. This allowed a person to transfer up to that amount during their lifetime as gifts or at death as bequests without incurring federal estate or gift tax.

For decedents in 2022, estates were subject to federal estate tax only if the taxable estate’s value exceeded the $12.06 million exemption. Any amount over this threshold was taxed at a top rate of 40%, meaning very few estates were subject to this tax.

The gift tax applies to transfers of property for less than full value. In 2022, an individual could give up to $16,000 to any number of people without filing a gift tax return or using their lifetime exemption; this is the annual gift tax exclusion. Gifts to a single person exceeding this amount in a year required filing a gift tax return and reduced the donor’s lifetime exemption.

Trusts are legal arrangements used in estate planning and are subject to their own income tax rules. Fiduciary income tax applies to income earned by estates and trusts that is not distributed to beneficiaries, and the tax rates are highly compressed.

Tax Administration and Procedure

Subtitle F of the Internal Revenue Code establishes the procedural rules between taxpayers and the IRS, covering filing, audits, and collections. A component of this subtitle is the statute of limitations, which sets deadlines for the IRS. The IRS has three years from when a return is filed or its due date, whichever is later, to assess more tax. This period extends to six years if a taxpayer omits over 25% of their gross income.

Taxpayers also have a limited time to claim a refund. The statute of limitations for refunds is the later of three years from the filing date or two years from the payment date. Failing to file a claim within this window results in forfeiting the refund. For a fraudulent return or failure to file, there is no statute of limitations.

The Code authorizes the IRS to charge interest on tax underpayments and pay interest on overpayments. These rates are set quarterly and are based on the federal short-term rate. For 2022, the rate began at 3% and increased to 6% by the fourth quarter. Interest compounds daily, meaning it is calculated on the tax due plus any accrued interest.

Penalties are another aspect of tax administration used to encourage compliance. The most common are for failing to file or pay on time. The failure-to-file penalty is 5% of the unpaid tax for each month a return is late, capped at 25%. The failure-to-pay penalty is 0.5% of the unpaid taxes for each month the tax is unpaid, also capped at 25%. When both penalties apply in the same month, the total is limited to 5%.