Every year, the Internal Revenue Service announces new tax brackets, as well as other important credits and deductions that affect your tax rate for the coming year. This is done to account for the fact that inflation varies from year to year.
Because salaries are frequently adjusted for inflation, if the IRS did not adjust the federal income tax brackets for inflation, you would most likely end up in a higher tax bracket. This is known as “bracket creep,” because the raise is unlikely to make you feel richer because the cost of living has risen, but you will end up paying more taxes.
Even though tax brackets change each year, higher-income people will always be taxed more than lower-income people.
Define tax brackets
A tax bracket is the range of incomes that are subject to a specific income tax rate. There are seven different tax brackets in the United States.
Tax brackets in 2022
To make inflation adjustments for the upcoming tax year, the IRS uses the average year-over-year chained consumer price index readings for 12 months beginning in August of the previous year and ending in September of the current year. Because it accounts for the substitutions made by consumers in response to higher prices, the chained index tends to rise more slowly than the CPI.
According to Robert McClelland, a senior fellow at the Urban-Brookings Tax Policy Center, the IRS procedure does “a pretty good job” of accounting for price increases. However, it does not take into account wage increases.
All else being equal, if you got a raise to keep up with inflation, you’ll probably face the same tax rate as the previous year. If your salary increased faster than the rate of inflation, you may be in a higher tax bracket. However, if your wages did not keep pace with inflation, as was the case for the average American worker in 2022, you may find yourself in a lower tax bracket than in 2021.
However, McClelland claims that the savings are minimal. The inflation-adjusted brackets “do not address the fact that your real income fell,” which means your income may cover fewer goods and services throughout the year due to inflation.
“You’re actually worse off, even if your taxes are lower,” McClelland explained.
Individual income tax brackets for 2022 are as follows:
37% for incomes exceeding $539,900.
35% for incomes exceeding $215,950.
32% for incomes exceeding $170,050.
24% for earnings of more than $89,075.
22% for earnings over $41,775.
12% on earnings over $10,275.
10% for earnings of $10,275 or less.
The tax brackets for married couples filing joint returns in 2022 are as follows:
37% for incomes exceeding $647,850.
35% on earnings over $431,900.
32% for incomes exceeding $340,100.
24% for incomes exceeding $178,150.
22% for incomes exceeding $83,550.
12% on earnings over $20,550.
10% for earnings of $20,550 or less. Tax bracket for the head of the household
For tax purposes, a head of a household is defined as the parent who pays for more than half of their household’s expenses. To account for the additional costs they cover, heads of households have higher income thresholds for each tax bracket than individual filers.
The following are the heads of household tax brackets for 2022:
37% on the portion of income above $539,900 plus an additional $161,218.50. 35% on the portion of income above $215,950 (but not over $539,900) plus an additional $47,836. 32% on the portion of income above $170,050 (but not over $215,950) plus an additional $33,148. 24% on the portion of income above $89,050 (but not over $170,050) plus an additional $13,708.
Are the tax brackets in 2022 the same as they were in 2021?
No.
The tax bracket thresholds for each of the seven tax brackets were raised. For example, the income threshold for the 37% top tax rate increased by $16,300 for individual filers in 2022 compared to 2021.
What will the tax brackets be in 2023?
Despite the fact that 2023 has only just begun, the IRS has already released tax brackets for the year that will be filed in 2024. Importantly, the tax brackets were calculated using the monthly average annual chained consumer price index values from August 2021 to September 2022, a period of historically high inflation.
This means that even if inflation falls further this year, the income thresholds in the 2023 tax brackets will remain higher. The 2022 tax brackets, on the other hand, were based on inflation data from 2020 to 2021, which was much lower than the inflation rate we experienced in 2022.
The income threshold for the top individual tax bracket was raised to $578,125 in 2023, up from $539,900 in 2022. This means that nearly $40,000 in personal income will be taxed at 35% rather than 37%.
How do I reduce my tax bracket?
There are numerous methods for lowering your tax bracket. Filing a joint return with your spouse may qualify you for a lower tax bracket if you are married. Alternatively, depending on your income and circumstances, you may be able to lower your tax bracket by filing an individual tax return.
Contributing to a 401(k) plan through your employer is another way to lower your tax bracket. This reduces your taxable income, putting you in a lower tax bracket. If your employer does not offer one, contributions to a traditional Individual Retirement Arrangement may qualify you for a tax deduction, which may help lower your tax bracket.
You should also consider taking the standard deduction rather than itemised deductions because it may put you in a lower tax bracket, depending on your financial situation.
