The United States operates under a progressive tax system that imposes a higher tax rate on taxpayers who have higher incomes. Generally, you’ll pay more tax as you move up the pay scale, which is accomplished by creating income tax brackets that group taxpayers based on income ranges.
Seven tax brackets exist for the 2021 tax year or taxes due in April 2022 or October 2022, with an extension. These are 10pc, 12pc, 22pc, 24pc, 32pc, 35pc and 37pc. The bracket you fall under depends on several factors such as your taxable income, credits, deductions, and your filing status: single taxpayer, married couples filing jointly, or married filing separately.
The IRS tends to adjust tax rates, allowances, and thresholds every year based on inflation.
Here’s a look at the brackets and tax rates for taxes due in April 2022.
Income Tax Rate
2021
Single Filers
Married Filing Jointly and Qualifying Widow(er)s
Head of Household
10%
$0 - $9,950
$0 - $19,900
$0 to $14,200
12%
$9,951 - $40,525
$19,901 - $81,05
$14,201 - $54,200
22%
$40,526 - $86,375
$81,051 - $172,750
$54,201 - $86,350
24%
$86,376 - $164,925
$172,751 - $329,850
$86,351 - $164,900
32%
$164,926 - $209,425
$329,851 - $418,850
$164,901 - $209,400
35%
$209,426 - $523,600
$418,851 - $628,300
$209,401 - $523,600
37%
$523,601 and above
$628,300 and above
$523,601 and above
For married couples filing separately, the tax brackets are similar to single filers, with deviations coming in for incomes above $209,425. The tax rates for married couples filing separately become:
In November 2021, the IRS provides tax inflation adjustments for tax year 2022. As such, here are the tax brackets for taxes due April 2023 or October 2023, with an extension.
Income Tax Rate 2022
Single Filers
Joint Filers
Heads of Households
10%
$0 to $10,275
$0 to $20,550
$0 to $14,650
12%
$10,275 to $41,775
$20,550 to $83,550
$14,650 to $55,900
22%
$41,775 to $89,075
$83,550 to $178,150
$55,900 to $89,050
24%
$89,075 to $170,050
$178,150 to $340,100
$89,050 to $170,050
32%
$170,050 to $215,950
$340,100 to $431,900
$170,050 to $215,950
35%
$215,950 to $539,900
$431,900 to $647,850
$215,950 to $539,900
37%
$539,900 and above
$647,850 and above
$539,900 and above
Almost everyone agrees that the current tax system is too complicated. Tax brackets are not as intuitive as they seem at first glance because odds are you’ll have to look at more than one tax bracket to figure out your effective tax rate. That’s why most people opt to work with a CPA firm for tax planning and business advisory services.
The tax bracket your top dollar falls into is your marginal tax rate. However, not all your income is levied at this rate across the board. Let's say you're a single taxpayer with a taxable income of $80,000 in tax year 2021. Your marginal tax rate is 22%, but here's how your taxes will be broken down.
Therefore, your total tax returns will amount to $13,217, or the sum of $1,027.50 +$3,780 + $8,409.50. As you can see, the last dollar you earn is taxed more than the first dollar you earn – this is technically the principle of a progressive tax system.
No one wants to pay higher taxes than they need to. Fortunately, you can lower your tax bill through tax credits and tax deductions.
Several tax credits exist to help low-income and middle-income households reduce the amount of taxes they owe. Some examples include:
You can also lower your income using tax deductions. For instance, you can deduct property taxes and the mortgage interest paid on a home loan. Additionally, there’s a defined dollar amount that lowers your taxable income.
Let's look at the 2021 and 2022 tax years, where the standard deduction is as follows:
Filing status
2021 tax year
2022 tax year
Single
$12,550
$12,950
Married, filing jointly
$25,100
$25,900
Married, filing separately
$12,550
$12,950
Head of household
$18,800
$19,400
The IRS allows you to take the standard deduction on a no-questions-asked basis. But taking the standard deduction means you cannot deduct home mortgage interest, medical expenses, plus charitable donations from your tax bill. If your standard deduction is less than your other deductions combined, it’s best to itemize your deductions and save money.
BAAP CPA is a CPA firm in Clearwater, specializing in helping individuals and small business owners with all matters of tax preparation and tax planning. As business advisors, we can help you get your house in order when filing taxes to ensure you don’t have to pay Uncle Sam more than what’s necessary.
