As you prepare to file your tax return, you may wonder how tax brackets affect what you owe. Maybe your accountant told you that you fall into the 32% tax bracket, but you aren’t sure what that means. The IRS follows a progressive tax system that raises tax rates as you make more money. But as simple as this system seems, it is often misunderstood. Below we shed some light on tax brackets and how they work.
How do tax brackets work?
A tax bracket is a tiered system used to calculate your taxes. Each tax bracket has a range of income to which a tax rate applies. There are seven income tax brackets with rates ranging from 10% at the lowest to 37% at the highest.
In a tiered system, if you make income in the lower bracket, you pay lower tax rates. As you move up to a higher tax bracket, not all of your income is taxed at a higher rate. Instead, you pay the higher tax rate on the amount earned that falls within that bracket.
Let’s say you’re in the 32% tax bracket. You aren’t paying a 32% tax rate on all of your income. Instead, only the income earned that falls within the 32% bracket is taxed at that rate.
What is a marginal tax rate?
Your marginal tax rate refers to the additional tax you pay on each extra dollar of income that you earn. As you make more money, your tax rate increases.
Marginal tax rates are part of a progressive income tax system, designed to place a lower tax burden on people who make less money. Accordingly, individuals with lower incomes pay a lower tax rate. Higher-earning individuals fall into higher tax brackets and pay a higher income tax rate.
How do you determine your tax bracket?
Your tax bracket is based on your filing status and your adjusted gross income for the year.
When you file your tax return, you will choose from one of five filing statuses:
- Single
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow/widower with a dependent child
Your adjusted gross income is the gross income you made for the year, less any allowable deductions that you can take. An income tax calculator is a helpful tool to determine which tax bracket you fall into and what your taxes may be for the year.
2022 Federal income tax brackets
To determine which federal income tax bracket you fall into, consider your filing status and your adjusted gross income for the year. The tax bracket you qualify for is based on your filing status as of the last day of the year. If you are married on December 31, your status would be married.
Below are the tax brackets for 2022, broken down by filing status.
Single filer
If your filing status is single, use the tax bracket below.
| Tax Rate | Taxable Income Bracket | Tax Owed |
| 10% | $0 – $10,275 | $0 – $1,027.50 |
| 12% | $10,276 – $41,775 | $1,027.50 + 12% |
| 22% | $41,776 – $89,075 | $4,807.50 + 22% |
| 24% | $89,076 – $170,050 | $15,213.50 + 24% |
| 32% | $170,051 – $215,950 | $34,647.50 + 32% |
| 35% | $215,951 – $539,900 | $49,335.50 + 35% |
| 37% | Exceeds $539,900 | $162,718 + 37% |
Married filing jointly
The following tax brackets apply if you are married and plan to file a joint return with your spouse. These rates also apply to a qualifying widow(er) with a dependent child.
| Tax Rate | Taxable Income Bracket | Tax Owed |
| 10% | $0 – $20,550 | $0 – $2,055 |
| 12% | $20,551 – $ 83,550 | $2,055 + 12% |
| 22% | $83,551 – $ 178,150 | $9,615 + 22% |
| 24% | $178,151 – $340,100 | $30,427 + 24% |
| 32% | $340,101 – $431,900 | $69,295 + 32% |
| 35% | $431,901 – $647,850 | $98,671 + 35% |
| 37% | Exceeds $647,850 | $174,253.50 + 37% |
Married filing separately
Married couples who file separate tax returns fall under the tax brackets below.
| Tax Rate | Taxable Income Bracket | Tax Owed |
| 10% | $0 – $10,275 | $0 – $1,027.50 |
| 12% | $10,276 – $41,775 | $1,027.50 + 12% |
| 22% | $41,776 – $89,075 | $4,807.50 + 22% |
| 24% | $89,076 – $170,050 | $15,213.50 + 24% |
| 32% | $170,051 – $219,950 | $34,647.50 + 32% |
| 35% | $215,951 – $323,925 | $49,335.50 + 35% |
| 37% | Exceeds $323,925 | $86,127.37 + 37% |
Head of household
If you are single or unmarried but have maintained a home for a qualifying dependent, such as a child or relative, you may fall under the head of household filing status. If you qualify for head of household filing status, you receive a larger deduction than if you filed as single.
| Tax Rate | Taxable Income Bracket | Tax Owed |
| 10% | $0 – $14,650 | $0 – $1,465 |
| 12% | $14,651 – $55,900 | $1,465 + 12% |
| 22% | $55,901 – $89,050 | $6,415 + 22% |
| 24% | $89,051 – $170,050 | $13,708 + 24% |
| 32% | $170,051 – $215,950 | $33,148.50 + 32% |
| 35% | $215,951 – $539,900 | $47,836.50+ 35% |
| 37% | Exceeds $539,900 | $162,218.50 + 37% |
Example of tax brackets
For example, if you are a single filer and your income is less than $10,275, you fall into the lowest bracket and will pay a 10% tax rate on what you have earned for the year. However, if earned $15,000 for the year, you fall into a higher tax bracket. So you will pay a 10% tax rate on the first $10,274, and then 12% of the amount that falls into the next bracket ($15,000 – $10,275 = $4,726).
You would calculate the tax you owe as follows:
10% bracket: $10,275 x 10% = $1,027.50
12% bracket: $4,725 x 12% = $ 567.00
Your total tax due would be $1,594.50.
How can you lower your tax bracket?
If you are eligible to claim a tax credit or tax deduction on your return, you can lower the amount of tax that you owe to the IRS. Tax credits and deductions work in different ways to reduce the amount of money you owe in taxes.
- Tax Deductions: A tax deduction reduces the income you will be taxed on. As your taxable income falls, you may find yourself in a lower tax bracket.
Common deductions available to taxpayers filing their Form 1040 include:
- Standard deduction
- IRA deduction
- The deductible portion of self-employment tax
- Educator expenses
- Student loan interest
- Charitable contributions you made in cash to a qualifying organization of up to $300 for single filers and $600 for married individuals filing a joint return. This deduction is only available for the 2021 tax year.
If your allowable deductions exceed the standard deduction above, you may be able to further reduce your taxable income by itemizing your deduction on Schedule A of Form 1040. Itemized deductions may include:
- Home mortgage interest
- Real estate taxes
- State and local taxes
- Medical and dental expenses that exceed 7.5% of your adjusted gross income
- Charitable contributions – if you itemize your deductions, you may be able to deduct cash charitable contributions made in 2021of up to 100% of your adjusted gross income.
- Tax Credit: Tax credits reduce the amount of tax you owe. Since they do not impact your tax income, a tax credit does not change your tax bracket.
Common tax credits include:
- Earned Income Tax Credit
- Child and Dependent Care Credit
- American Opportunity Credit or Lifetime Learning Credit
- Plug-in Electric Drive Vehicle Credit
Suppose you were eligible for but did not receive the Economic Impact Payments that the IRS issued concerning COVID-19. In that case, you may also be able to claim the Recovery Rebate Credit.
Unveiling the mystery behind tax brackets
The US follows a phased tax system that bases tax rates on your income. The tax bracket you fall in depends on your filing status at the end of the year and your adjusted income. Despite this simple concept, tax brackets can be challenging. You may be in a higher tax bracket if you make more money. The good news is that you won’t pay a higher tax rate on all your earnings; only the income you made within the bracket is subject to the higher rate.
FAQ
What is a tax bracket and how does it work?
Tax brackets represent a range of income with different tax rates assigned. The tax rate individuals pay is based on how much money they make. Taxpayers with lower incomes pay a lower income rate, whereas taxpayers with higher incomes pay a higher tax rate.
Are tax brackets based on gross income?
The tax bracket you fall into is based on your adjusted gross income or AGI. Your AGI is calculated by taking your gross income for the year and subtracting any allowable deductions that you qualify for.
How can I avoid higher tax brackets?
You may avoid a higher tax bracket if you qualify for more deductions. For example, if you itemize your deductions, an increase in your charitable giving may keep you in a lower tax bracket.
