Every year, the Internal Revenue Service announces new tax brackets among othercrucial credits and deductions that determine your tax ratefor the upcoming year. This is done to account for inflation which varies from year to year.
If the IRS didn't adjust the federal income tax brackets for inflation you'd likely end up in a higher tax bracket since salaries are often adjusted for inflation. This is known as "bracket creep" since the raise likely doesn't leave you feeling richer because the cost of living rose, yet you'd find yourself paying more taxes.
Even though tax brackets change each year, higher-income people always will fall under higher tax brackets than lower-income people.
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Tax bracket definition
A tax bracket is the range of incomes subject to a particular income tax rate. In the U.S. there are seven different tax brackets.
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Federal income tax bracket 2022
The IRS uses theaverage year-over-year chained consumer price index readings for 12 months beginning in August of the prior year through September tomake inflation adjustments for the upcoming tax year. The chained index tends to rise more slowly than CPI because it takes into account the substitutions consumers make in response to higher prices.
The procedure the IRS followsdoes "a pretty good job" of accounting for increased prices, said Robert McClelland, a senior fellow at the Urban-Brookings Tax Policy Center. However, it does not account for increased wages.
That means that if you got a raise to keep up with inflation you'll likely face the same tax rate as the prior year, all else equal. If your salary rose by more than the rate of inflation you may fall under a higher tax bracket. But if your wages didn't keep up with inflation, which was the case for the averageAmerican worker in 2022, you could end up in a lower tax bracket compared to 2021.
It's not much of a savings though, McClelland said. The inflation-adjusted brackets "aren't addressing the fact that your real income fell," meaning your income could cover fewer goods and services due to inflation throughout the year.
"You're actually worse off even though your taxes may be lower," McClellandsaid.
What is the top tax bracket?
The highest individual tax bracket is 37% for people who earned more than 539,000 in 2022.
2022 tax brackets
The 2022 tax brackets for people filing individual returns are:
- 37% for incomes greater than $539,900.
- 35% for incomes over $215,950.
- 32% for incomes over $170,050.
- 24% for incomes over $89,075.
- 22% for incomes over $41,775.
- 12% for incomes over $10,275.
- 10% for incomes $10,275 or less.
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Tax brackets married filing jointly
The tax brackets for married couples filingjoint returns are:
- 37% for incomes greater than $647,850.
- 35% for incomes over $431,900.
- 32% for incomes over $340,100.
- 24% for incomes over $178,150.
- 22% for incomes over $83,550.
- 12% for incomes over$20,550.
- 10% for incomes $20,550 or less.
Head of household tax bracket
For tax purposes, the IRS generally defines a head of a household as the parent who pays for more than half of their household's expenses. Heads of households have higher income thresholds for each taxtax bracket thanindividual filersto account for the additional costs they cover.
The heads of household tax bracketsfor this tax year are:
- 37% on the portion of income above $539,900plus 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.
- 22% on the portion of income above $55,900 (but not over $89,050) plus an additional $6,415.
- 12% on the portion of income above $14,650 (but not over$55,900)plus an additional$1,465.
- 10% on income below$14,650.
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Are 2022 tax brackets the same as 2021?
No.
The thresholds for each of the seven tax brackets increased. For instance, the income threshold for the top tax rate, 37%, increased by $16,300 for individual filers in 2022 from 2021.
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Taxbrackets 2023vs 2022
The IRS already released tax brackets for the 2023 tax year that will be filed in 2024. Importantly, the tax brackets were based on the average annual chained consumer price index values each month from August 2021 to September 2022, a period of historically high inflation.
This means that even if inflation continues to drop this year, the income thresholds in 2023 tax brackets will remain higher. On the flip side, the 2022 tax brackets were based on inflation data from 2020 to 2021 which was much lower than the inflation rate we experienced in 2022.
For the top individual tax bracket, the 2023 income threshold was raised to above $578,125 versus$539,900 in 2022. This means that nearly $40,000 in individualincome will be taxed at 35% instead of 37%.
Here are the other 2023 tax brackets for individual filers:
- 35% for incomes over $231,250.
- 32% for incomes over $182,100.
- 24% for incomes over $95,375.
- 22% for incomes over $44,725.
- 12% for incomes over $11,000.
- 10% for income below $11,000.
2023 tax brackets for married couples filing joint returns are:
- 37% for income greater than $693,750.
- 35% for incomes over $462,500.
- 32% for incomes over $364,200.
- 24% for incomes over $190,750.
- 22% for incomes over $89,450.
- 12% for incomes over $22,000.
- 10% for income below $22,000.
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How can I lower my tax bracket?
There are a lot of different ways you can lower your tax bracket. If you're married, filing a joint return with your spouse could qualify you for a lower tax bracket. Or depending on your income and circ*mstances, you may lower your tax bracket by filing an individual return.
Another way to lower your tax bracket is by contributing to a 401(k) if your employer offers one. This will lower your taxable income which can put you in a lower bracket. If your employer doesn't have one, contributions to a traditionalIndividualRetirement Arrangement could help you qualify for a tax deductionwhich could also help lower your bracket.
You may also want to run the numbers on taking the standard deduction instead of itemized deductions since it could put you in a lower bracket, depending on your financial situation.
More of your 2022 tax season questions answered
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- Is it better to pay someone to do your taxes or do them yourself? We'll help you decide.
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Elisabeth Buchwald is apersonal finance and markets correspondentfor USA TODAY.You canfollow her on Twitter @BuchElisabeth and sign up for ourDaily Money newsletterhere
The topic of tax brackets, inflation adjustments, and their impact on federal income tax is quite extensive. I can certainly help break down the key concepts and terms mentioned in the article.
Tax Brackets:
Tax brackets delineate the range of incomes subject to specific income tax rates. In the U.S., there are seven tax brackets. Each bracket has its own tax rate, and as income increases, it moves into higher tax brackets, resulting in a higher tax rate applied to that portion of income.
Inflation Adjustment and Bracket Creep:
The Internal Revenue Service (IRS) adjusts tax brackets annually for inflation using the year-over-year chained consumer price index readings. This prevents bracket creep, where individuals might move into higher tax brackets solely due to inflation-related salary increases. However, this adjustment doesn't consider increased wages, potentially causing individuals to pay higher taxes if their income rises faster than inflation.
Tax Filing Forms:
Several forms are crucial for tax filing:
- 1099: Reports various types of income, such as freelance or contract work.
- W-4: Used by employers to withhold the correct amount of federal income tax from an employee's paycheck.
- W-2: Summarizes an employee's annual earnings and the amount of taxes withheld by the employer.
- W-9: Used by businesses to request a taxpayer identification number for tax reporting purposes.
- 1040: The standard IRS form for individual income tax returns.
Tax Filing Deadlines:
The earliest date to file taxes for the 2023 tax year was January 23. However, tax filing deadlines can vary for different types of taxpayers.
Joint vs. Separate Filing:
Married couples can choose to file taxes jointly or separately. The choice between these filing statuses can affect tax liabilities and deductions.
Head of Household:
The IRS defines a head of household as a person who covers more than half of their household's expenses. They have separate tax brackets with higher income thresholds compared to individual filers.
2022 and 2023 Tax Brackets:
The tax brackets and income thresholds change annually due to inflation adjustments. Understanding these brackets helps individuals estimate their tax liabilities for a given year.
Strategies to Lower Tax Brackets:
There are various strategies individuals can employ to potentially lower their tax brackets, such as contributing to retirement accounts (like 401(k) or IRA), choosing the right filing status, utilizing deductions, and more.
Understanding these concepts and applying relevant strategies can significantly impact an individual's tax obligations and financial planning for the year.
