by Every year, the Internal Revenue Service announces new tax brackets among other crucial credits and deductions that determine your tax rate for the coming year. This is done to take into account inflation which varies from year to year.
If the IRS didn’t adjust federal income tax brackets for inflation, you would likely end up in a higher tax bracket, as salaries are usually adjusted for inflation. This is known as “support growth”, as the increase probably doesn’t make you richer because the cost of living has increased, but you would pay more taxes.
Even though tax brackets change each year, people with higher incomes will always fall into higher tax brackets than people with lower incomes.
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Definition of tax bracket
A tax bracket is the income bracket subject to a certain income tax rate. In the US, there are seven different tax brackets.
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2022 federal income tax bracket
The IRS uses the year-to-year chain consumer price index average readings for 12 months, starting in August of the prior year through September, to make inflation adjustments for the next fiscal year. The chained index tends to rise more slowly than the CPI because it takes into account the substitutions that consumers make in response to higher prices.
The procedure followed by the IRS does “a good job” of accounting for the price increase, said Robert McClelland, senior fellow at the Urban-Brookings Tax Policy Center. However, it does not represent the increase in wages.
This means that if you receive a raise to keep up with inflation, you will likely be facing the same tax rate as the year before, all else being equal. If your salary has increased by more than the rate of inflation, you may fall into a higher tax bracket. But if your salary doesn’t keep up with inflation, as the average American worker did in 2022, you could end up in a lower tax bracket compared to 2021.
It’s not a huge savings, though, McClelland said. Inflation-adjusted bands “are not addressing the fact that your real income has dropped,” meaning your income may cover fewer goods and services due to inflation over the course of the year.
“Actually, you’re worse off, even if your taxes are lower,” McClelland said.
What is the highest tax bracket?
The highest individual tax bracket is 37% for people who earned more than 539,000 in 2022.
2022 tax bands
The 2022 tax brackets for people filing individual returns are:
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37% for income greater than $539,900.
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35% for earnings over $215,950.
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32% for earnings over $170,050.
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24% for earnings over $89,075.
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22% for earnings over $41,775.
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12% for earnings over $10,275.
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10% for earnings of $10,275 or less.
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Married declaring joint tax brackets
The 2022 tax brackets for couples filing joint returns are:
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37% for income greater than $647,850.
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35% for earnings over $431,900.
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32% for earnings over $340,100.
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24% for earnings over $178,150.
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22% for earnings over $83,550.
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12% for earnings over $20,550.
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10% for earnings of $20,550 or less.
Head of household tax bracket
For tax purposes, the IRS generally defines the head of household as the father who pays more than half of his family’s expenses. Household heads have higher income thresholds for each tax bracket than individual taxpayers to account for the additional costs they cover.
The heads of domestic tax brackets for 2022 are:
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37% on the portion of income above $539,900 plus an additional $161,218.50.
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35% on portion of income over $215,950 (but not over $539,900), plus an additional $47,836.
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32% on portion of income over $170,050 (but not over $215,950) plus an additional $33,148.
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24% on portion of income over $89,050 (but not over $170,050), plus an additional $13,708.
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22% on the portion of income above $55,900 (but not above $89,050), plus an additional $6,415.
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12% on the portion of income above $14,650 (but not above $55,900), plus an additional $1,465.
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10% on earnings under $14,650.
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Are the 2022 tax brackets the same as the 2021 ones?
No.
The limits for each of the seven tax brackets have been increased. For example, the income threshold for the top rate, 37%, increased by $16,300 for individual taxpayers in 2022 compared to 2021.
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Federal tax brackets for 2023
Although 2023 has just begun, the IRS has already released tax brackets for the year that will be filed in 2024. It is important to note that the tax brackets were based on the annual average values of the chain consumer price index for each month of August 2021 to September 2022, a period of historically high inflation.
This means that even if inflation continues to fall this year, the income limits on the 2023 tax brackets will remain higher. On the other hand, the 2022 tax bands were based on inflation data from 2020 to 2021, which were much lower than the inflation rate we experienced in 2022.
For the main individual tax bracket, the 2023 income threshold has been raised above $578,125 from $539,900 in 2022. This means that nearly $40,000 in individual income will be taxed at 35% instead of 37%.
Here are the other 2023 tax brackets for individual filers:
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35% for earnings over $231,250.
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32% for earnings over $182,100.
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24% for earnings over $95,375.
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22% for earnings over $44,725.
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12% for income over $11,000.
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10% for income under $11,000.
The 2023 tax brackets for couples filing joint returns are:
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37% for income greater than $693,750.
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35% for earnings over $462,500.
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32% for earnings over $364,200.
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24% for earnings over $190,750.
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22% for earnings over $89,450.
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12% for earnings over $22,000.
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10% for income under $22,000.
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How can I reduce my tax rate?
There are many different ways to lower your tax rate. If you are married, filing a joint return with your spouse may qualify you for a lower tax bracket. Or, depending on your income and circumstances, you can lower your tax bracket by filing an individual return.
Another way to reduce your tax bracket is by contributing to a 401(k), if your employer offers one. This will reduce your taxable income, which could put you in a lower bracket. If your employer doesn’t have one, contributions to a traditional Individual Retirement Arrangement can help you qualify for a tax deduction which can also help lower your income bracket.
You may also want to crunch the numbers to get the standard deduction rather than itemized deductions, as this may put you in a lower bracket depending on your financial situation.
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Elisabeth Buchwald is personal finance and markets correspondent for USA TODAY. You can ffollow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here
This article originally appeared on USA TODAY: How do I know what tax bracket I’m in? Here are the brackets for 2022
