December 08, 2021

Every year, the IRS releases what the new tax brackets will be. These brackets are for the next tax year, which hasn’t started yet. For example, the 2022 tax brackets, which will be discussed here in detail, will affect those who file their tax returns in the early months of 2023.

This tax bracket release usually spurs questions such as: How are these tax brackets determined? What happens when someone moves from one bracket to another? Is inflation taken into account? What about the different breakdowns, depending on a taxpayer’s filing status?

All of those questions and more will be answered here, as it’s crucial that taxpayers know ahead of time which tax bracket they fall into.

How Are the Tax Brackets Determined?

Tax brackets change from year to year due to inflation. People tend to notice inflation the most when they’re in the grocery store, as it’s the one place where they buy the same items on a weekly or monthly basis. For example, they may realize when the price of a loaf of bread goes up by 50 cents and stays there. Inflation affects a person’s taxes as well because they may end up getting a raise in income, but it doesn’t mean as much, due to the fact that everything they want to buy with that money costs more.

Currently, the IRS using a method of measuring inflation called the Chained Consumer Price Index, or C-CPI, in order to determine the tax brackets. In previous years, they used the Consumer Price Index or CPI to figure out those numbers, but since 2018, have relied on the C-CPI instead. The Chained Consumer Price Index is put together and published by the Bureau of Labor Statistics. They’ve created the document every year since 2002, and it’s considered to be an accurate measurement of the general cost of living. It looks at spending patterns and prices in order to determine the rate of inflation.

What Does “Bracket Creep” Mean?

Why does inflation play such a large role in the yearly tax brackets? The short answer is that the IRS needs to consider something called “bracket creep.” This is a term used to describe the changes that people see in their income. When someone ends up in a different tax bracket, despite making any additional money, then they creep up a bracket. Changing the tax brackets pushes them back down to where they should be. In addition, if a taxpayer receives less value for their tax deductions and credits, then they are affected by inflation in that manner as well, which is another form of bracket creep.

The 2022 Tax Brackets

For 2022, the IRS has placed taxpayers into seven different income categories, all of which are broken down into three separate filing statuses: single filers, which are also known as individuals; couples who are married and filing jointly; and those who are the heads of their households.

The first tax bracket, which consists of single filers who make less than $10,275; those who are married and filing jointly and make less than $20,500; and heads of households who make less than $14.650, all need to pay 10% in federal income taxes in 2022.

Next is the group of people who will pay 12% in federal income taxes next year. They consist of individuals who make between $10,275 and $41,775; married couples filing together who make between $20,550 and $83,550; and heads of households who make $14,650 to $55,900.

Third down is the category of taxpayers who will 22% in federal income taxes. This is quite a jump from the previous group. Those who fit into this category include individuals who make between $41,775 and $89,075; married couples (filing jointly, of course) who make between $83,550 and $178,150; and heads of households with an income between $55,900 and $89,050.

The next bracket only has a small jump in income percentage, going up by a mere 2%. Those who fit into this group need to pay 24%. The group consists of individuals who make between $89,075 and $170,050; married couples filing together who make between $178,150 and $340,100; and heads of households who make $89,050 to $170,050.

Next up is a tax bracket consisting of individuals who make between $170,050 and $215,950; married couples filing together who make between $340,100 and $431,900; and heads of households who make $170,050 to $215,950. These taxpayers must pay 32% in federal income taxes.

The second highest tax bracket has a rate of 35% in federal income taxes. People in this bracket include individuals who make between $215,950 and $539,900; married couples filing together who make between $431,900 and $647,850; and heads of households who make $215,950 to $539,900.

The final tax bracket is made up of people who must pay 37% in federal income taxes. The group is made up of individuals who make $539,900 and up; married couples filing together who make $647,850 and up; and heads of households who make $539,900 or more.

Note that the percentages of taxes that are listed here are before any tax deductions and credits are taken out. The actual amounts that taxpayers will pay depend on the credits and deductions that they qualify for. Once those tax deductions are subtracted from their income, they may place the taxpayer in a lower bracket. In addition, tax credits can lower the amount of taxes that a taxpayer (individual, married filing jointly, or head of household) owes to the IRS.

Other Tax Changes That Filers Need to Know About

In addition to changes in the tax brackets, the IRS adjusted many different things, from the standard deduction to the Alternative Minimum Tax. These changes were made to minimize the effects of inflation, as well as to highlight the adjustments to the tax brackets. The changes include:

  • Personal Exemptions – The one thing that hasn’t changed, the personal exemption is still set at $0.
  • Standard Deductions – The standard deduction went up for both individual taxpayers ($400) and those who are married filing jointly ($800). The standard deductions are now set as $12,950 for individuals, $25,900 for married couples filing jointly, and $19,400 for heads of households.
  • Child Tax Credit – Currently, the refundable portion of the child tax credit is set at $1,400. In 2022, that will go up to $1,500. In addition, the maximum amount is unchanged at $2,000.

Additional 2022 Tax Changes

On top of these smaller changes to the tax system, there are some longer, more complicated adjustments as well, such as those that were made to the Alternative Minimum Tax and the Earned Income Tax Credit.

Alternative Minimum Tax

The Alternative Minimum Tax targets taxpayers who make more money than most. People who fall into the highest tax brackets need to do their taxes two different times, once at their usual tax rates in whichever bracket they fall into, and another during the Alternative Minimum Tax system. Then, they pay whichever amount is higher. The exemption amounts for the Alternative Minimum Tax in 2022 are $75,900 for individuals who are not married, and $118,100 for married couples. Those who make more than $206,100 have to pay the 28% Alternative Minimum Tax rate. There are exemptions, but they are phased out once the taxpayer reaches a certain threshold. Currently that is at 25 cents per dollar in income. The phase outs occur at $539,900 for individuals and $1,079,800 for those are married filing jointly.

Earned Income Tax Credit

The Earned Income Tax Credit went up for the 2022 tax year as well. It is currently set at varying amounts, depending on which specific bracket the taxpayer falls into and how many qualifying children that they have.

For those who have no children and are filing as individuals or heads of households, the Earned Income Tax Credit is set at $7,320 with a complete phaseout amount set at $ $16,480. The maximum credit for those in this tax bracket is $560. Individuals with one child ($10,980 for a maximum credit of $3,733), two children ($15,410; $6,164), or three or more children ($15,410; $6,935) can earn up to $53,057 (depending on the number of children that they have) before the credit phases out completely.

Married couples who file jointly can qualify for the Earned Income Tax Credit as well. The credit amounts and the lower thresholds are very much the same. The only differences lie in the maximum amounts that they can make before the credit phases out entirely. Those amounts are slightly higher than the single or head of household numbers.

Contact Us for Assistance

If you have questions about which 2022 tax bracket you fall into or are unsure of what your particular tax bracket means for your finances, please reach out to us. The tax advisors at Enterprise Consultants Group can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.

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