How Do Tax Brackets Impact Your Wallet?
“Bracket creep” might sound like someone who cheats on their NCAA basketball tournament bracket every March, but it actually refers to what happens when people are pushed into higher income tax brackets due to inflation rather than a rise in real income. That’s a real concern these days — and something that will impact your taxes and wallet in 2022.
Tax Brackets 2022: How Much Will You Pay Based on Latest IRS Inflation Adjustments?Tax Brackets 101: Here Are the Basics You Need To Understand
Every year the IRS adjusts more than 60 tax provisions for inflation to prevent bracket creep, the Tax Foundation reported last week. The IRS uses the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts and credit values.
So what does it mean for you? For one thing, you can expect your tax bracket to be slightly higher next year. For another, you can expect your standard deduction to be higher as well. These adjustments are for the 2022 tax year and will come into play when you file your 2023 tax return.
Tax brackets basically refer to the income level you fall into. The more you earn, the more you pay in taxes. IRS lists seven tax brackets in all.
Here are the new federal tax brackets for income earned in 2022:
- 37% for incomes over $539,900, or $647,850 for married couples filing jointly
- 35% for incomes over $215,950 ($431,900 for married couples filing jointly)
- 32% for incomes over $170,050 ($340,100 for married couples filing jointly)
- 24% for incomes over $89,075 ($178,150 for married couples filing jointly)
- 22% for incomes over $41,775 ($83,550 for married couples filing jointly)
- 12% for incomes over $10,275 ($20,550 for married couples filing jointly)
- 10% for incomes of $10,275 or less ($20,550 for married couples filing jointly
Note that if your status is “married filing separately,” you’ll pay the same rate as unmarried taxpayers.
Here’s how those tax brackets compare to the 2021 brackets:
- 37% for incomes over $523,600 ($628,300 for married couples filing jointly)
- 35% for incomes over $209,425 ($418,850 for married couples filing jointly)
- 32% for incomes over $164,925 ($329,850 for married couples filing jointly)
- 24% for incomes over $86,375 ($172,750 for married couples filing jointly)
- 22% for incomes over $40,525 ($81,050 for married couples filing jointly)
- 12% for incomes over $9,950 ($19,900 for married couples filing jointly)
- 10% for incomes up to $9,950 ($19,900 for married couples filing jointly)
As the AARP pointed out, your highest tax bracket doesn’t necessarily reflect how much you will pay in federal income taxes. For that, the agency uses a tiered scale. For example, if you’re a single filer in the 22% tax bracket for 2022, that doesn’t mean you’ll pay 22% on all of your taxable income. Instead, you’ll pay 10% on taxable income up to $10,275, 12% on the amount from $10,275, to $41,775 and 22% on any amount above that up to $89,075.
Meanwhile, the standard deduction for the 2022 tax year will rise to $12,950 for single filers from $12,550 this year. The standard deduction for couples filing jointly bet $25,900 in 2022, up from $25,100 in the 2021 tax year.
Single filers age 65 and older who are not surviving spouses can increase the standard deduction by $1,750 in 2022. Each joint filer 65 and older can increase the standard deduction by $1,400 each, for a total of $2,800 if both joint filers are 65-plus.
See: What Is the Marriage Penalty and When Does It Affect You Most?Find: Experts Walk You Through the Potential Tax Pitfalls of Seasonal Holiday Side Gigs
The Alternative Minimum Tax (AMT) exemption amount for 2022 is $75,900 for single taxpayers and $118,100 for married couples filing jointly. The AMT is designed to prevent high-income taxpayers from avoiding individual income tax. Taxpayers can exempt a significant amount of their income as a way of preventing low- and middle-income taxpayers from being subject to the AMT.
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