Tax Tip of the Week | Knowing Your Tax Rate

What Are the Income Tax Brackets for 2022 vs. 2023? Depending on your taxable income, you can end up in one of seven different federal income tax brackets – each with its own marginal tax rate.

When it comes to federal income tax rates and brackets, the tax rates themselves aren't changing from 2022 to 2023. The same seven tax rates in effect for the 2022 tax year – 10%, 12%, 22%, 24%, 32%, 35% and 37% – still apply for 2023. However, the tax brackets for 2022 and 2023 are different (i.e., new beginning and ending dollar amounts are established for each bracket). That's because the brackets are adjusted each year to account for inflation. As a result, you could end up in different tax brackets in 2022 and 2023. That, of course, also means you could pay a different tax rate on some of your income from 2022 to 2023.

The tax bracket ranges also differ depending on your filing status. For example, for single filers, the 22% tax bracket for the 2022 tax year starts at $41,776 and ends at $89,075. However, for head-of-household filers, it goes from $55,901 to $89,050. (For 2023, the 22% tax bracket range for singles is from $44,726 to $95,375, while the same rate applies to head-of-household filers with taxable income from $59,851 to $95,350.) So, that's something else to keep in mind when you're filing a return or planning to reduce a future tax bill.

Now, let's get to the actual tax brackets for 2022 and 2023. When you're working on your 2022 federal income tax return next year – which will be due on April 18, 2023 (or October 16, 2023, if you request an extension next year) – here are the tax brackets and rates you'll need:

 2022 Tax Brackets for Single Filers and Married Couples Filing Jointly

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2022 Tax Brackets for Married Couples Filing Separately and Head-of-Household Filers

How Much Is Your Standard Deduction?

If you're already thinking about how to handle your 2023 finances in a tax-efficient way — even though it's still only 2022 – here are the 2023 federal income tax brackets and rates:

2023 Tax Brackets for Single Filers and Married Couples Filing Jointly

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2023 Tax Brackets for Married Couples Filing Separately and Head-of-Household Filers

Inflation's Impact on the 2023 Brackets

Since inflation has been unusually high lately, the inflation adjustments impact the tax brackets more this year than what we're used to seeing. This shows up when we look at the "width" of the 2023 brackets and see that they got comparatively wider than before. (By width, we mean the amount of income taxed at the applicable rate – so the difference between the bracket's lowest dollar amount and its highest dollar amount.)

How Inflation Can Impact Your Taxes

Take, for example, the 22% bracket for single taxpayers. For the 2021 tax year, the bracket ranged from $40,526 to $86,375 and covered $45,849 of taxable income ($86,375 – $40,526 = $45,849). For 2022, the 22% bracket for singles goes from $41,776 to $89,075 and covers $47,299 of taxable income ($89,075 – $41,776 = $47,299). So, from 2021 to 2022, the 22% bracket for single filers got $1,450 wider ($47,299 – $45,849 = $1,450).

For 2023, however, the width of the 22% singles bracket grew by more than twice as much. The 2023 bracket covers $50,649 of taxable income ($95,375 – $44,726 = $50,649), which is $3,350 wider than for 2022.

But that's OK – wider tax brackets are a good thing, because it helps prevent "bracket creep." When a bracket gets wider, there's less of a chance that you'll end up in a higher tax bracket if your income stays the same or doesn't grow at the rate of inflation from one year to the next.

How the Tax Brackets Work

Suppose you're single and end up with $100,000 of taxable income in 2022. Since $100,000 is in the 24% bracket for singles, will your 2022 tax bill simply a flat 24% of $100,000 – or $24,000? No! Your tax is actually less than that amount. That's because, using marginal tax rates, only a portion of your income is taxed at the 24% rate. The rest of it is taxed at the 10%, 12%, and 22% rates.
 
Here's how it works. Again, assuming you're single with $100,000 taxable income in 2022, the first $10,275 of your income is taxed at the 10% rate for $1,028 of tax. The next $31,500 of income (the amount from $10,276 to $41,775) is taxed at the 12% rate for an additional $3,780 of tax. After that, the next $47,300 of your income (from $41,776 to $89,075) is taxed at the 22% rate for $10,406 of tax. That leaves only $10,925 of your taxable income (the amount over $89,075) that is taxed at the 24% rate, which comes to an additional $2,622 of tax. When you add it all up, your total 2022 tax is only $17,836. (That's $6,164 less than if a flat 24% rate was applied to the entire $100,000.)

Now, suppose you're a millionaire. (We can all dream, right?) If you're single, only your 2022 income over $539,900 is taxed at the top rate (37%). The rest is taxed at lower rates as described above. So, for example, the tax on $1 million for a single person in 2022 is $332,955. That's a lot of money, but it's still $37,045 less than if the 37% rate were applied as a flat rate on the entire $1 million (which would result in a $370,000 tax bill).

Capital Gains Tax Rates

It's important to note that the tax rates on capital gains from the sale of stocks, bonds, cryptocurrency, real estate, and other capital assets aren't necessarily the same as the tax rates mentioned above for wages, interest, retirement account withdrawals, and other "ordinary" income. When determining the tax on capital gains, the rates that apply generally depend on how long you held the capital asset before selling it.

Capital Gains Tax on Real Estate

If you hold a capital asset for one year or less, any gain from the sale is considered short-term capital gain and taxed using the rates for ordinary income listed above. However, if you hold the asset for more than one year, the gain is treated as long-term capital gain and taxed a lower rate – either 0%, 15%, or 20%. As with the ordinary tax rates and brackets, which specific long-term capital gains tax rate applies depends on your taxable income. However, the long-term capital gain brackets are set up so that you'll generally pay tax at a lower rate than if the ordinary tax rates and brackets were applied.

Will Income Tax Rates Go Up in the Future?

The Tax Cuts and Jobs Act of 2017 changed the federal income tax rates to what they are now. However, the new rates are only temporary – they expire after 2025. So, starting in 2026, the tax rates are schedule to revert back to the previous rates, which were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

Whether that actually happens or not remains to be seen. If the Democrats can maintain control of the House of Representatives and gain at least one more seat in the Senate during the 2022 midterm elections, then we might see a bill on President Biden's desk soon to push the top rate from the current 37% back up to 39.6% before 2026. Other rates could be adjusted, too.

Of course, if the Republicans take control of either the House or Senate, then the odds of such a change are slim to none. Looking forward to 2024, if the Republicans can gain control of Congress and the White House, then there's a good chance that the current (lower) rates will be extended beyond 2026.

Getting Into a Lower Tax Bracket and Paying a Lower Tax Rate

Tax professionals spend countless hours trying to move their clients into a lower tax bracket. The key, of course, is reducing your taxable income. And, fortunately, there are number of easy (and smart!) things you can do yourself to knock down the taxable income on your next return. For example, putting money into a traditional IRA or 401(k) account will reduce your taxable income because contributions to these accounts are made on a "pre-tax" basis, which means what you put in doesn't count as income (up to a certain limit). You'll also be building your nest egg for retirement.

Save More for Retirement in 2023 Thanks to Higher IRA and 401(k) Contribution Limits

You should also make sure you're taking advantage of any deductions you're entitled to claim. This includes the many "above-the-line" deductions provided in the tax code. When it comes to choosing between the standard deduction and itemized deductions, make sure you're picking the larger of the two options (itemized deductions include write-offs for medical expenses, state and local taxes, mortgage interest, gifts to charity, and more).

And, while they don't reduce taxable income because they're subtracted after your tax is calculated, don't forget about tax credits. These are actually more valuable than tax deductions, since they're subtracted on a dollar-for-dollar basis from your tax bill. For example, if you're in the 22% tax bracket, a $1,000 tax deduction will save you $220 ($1,000 x .22 = $220). However, a $1,000 tax credit can actually be worth $1,000 (unless it's a nonrefundable credit and your tax bill is less than $1,000). There's a wide variety of tax credits available, such as for education expenses, saving for retirement, energy-efficient upgrades to your home, buying an electric vehicle or EV charging equipment, having a child, and child and dependent care expenses – just to name a few.

Credit goes to Rocky Mengle, whose article published October 31, 2022 by Kiplinger can be found at https://www.kiplinger.com/taxes/tax-brackets/602222/income-tax-brackets

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.
 
This Week’s Author, Zak Kitzmiller