The IRS recently released the new tax brackets for the 2022 tax year so now you can start thinking about how to handle your 2022 finances in a tax-efficient way. The seven 2022 tax rates themselves didn't change (they are the same as those in effect for the 2021 calendar year), however the tax bracket ranges were modified based on inflation. You could be in a different tax bracket for 2022 than the last time you reported your taxes, even if your income has not changed.
Tax Brackets Are Marginal
Being "in" a certain tax bracket doesn't mean you pay that federal income tax rate on everything you make. The progressive tax system means that people with higher taxable incomes are subject to higher federal income tax rates and people with lower taxable incomes are subject to lower federal income tax rates.
The IRS divides income into different tax rates. Each subsequent portion of your income will have an increased tax rate. For example, if you are single and make $40,526 in 2022, your first $10,275 will be taxed at 10 percent. The next portion of your income, from $10,275 to $41,775 will be taxed at an increased rate of 12 percent. The next portion of your income, from $41,775 to $89,075 will be taxed at 22% and so on.
Again, if you're in the 24% tax bracket it does not mean that you pay 24% income tax across the board. As your income increases you’ll fall into higher tax brackets and will have a higher tax rate for each portion of your increased income.
Why Would My Tax Bracket Be Different?
The IRS regularly adjusts tax brackets to take inflation into consideration. This is because with inflation people will face higher prices. That means the purchasing power of their dollar is decreased. Knowing this, the IRS adjusts brackets in order to avoid bracket creep, a circumstance that occurs when inflation pushes your income into a higher tax bracket or credits and deductions are reduced. In this scenario an individual may not actually have increased purchasing power or greater disposable income, even with an increase in wages and salaries.
2022 Tax Brackets
Without further ado, here are the 2022 tax brackets according to your filing status and income from the IRS:
Single 2022 Tax Brackets
|Taxable Income||Tax Bracket:|
Married Filing Jointly 2022 Tax Brackets
|Taxable Income||Tax Bracket:|
Head of Household 2022 Tax Brackets
|Taxable Income||Tax Bracket:|
Married Filing Separately 2022 Tax Brackets
|Taxable Income||Marginal Tax Rate:|
In addition to the tax inflation adjustments, the IRS also altered standard deductions. While the above rates and brackets are at the federal level, different states might have varying brackets and rates. The table below shows the standard deduction amounts for 2021:
2021 Standard Deduction
2022 Standard Deduction
Married filing jointly
Head of household
Single/ married filing separately
*The additional standard deduction for people who have reached age 65 (or who are blind) is $1,400 for each married taxpayer or $1,750 for unmarried taxpayers.
IRA Contribution Limits
The contribution limit for Roth IRA and traditional IRA accounts is unchanged at $6,000.
The catch-up contribution limit for people age 50 or over does not get inflation adjustments and therefore is still $1,000.
401(k), 403(b), 457(b) Contribution Limits
The salary deferral limit for 401(k) and other similar plans is increased from $19,500 to $20,500.
The catch-up contribution limit for 401(k) and other similar plans for people age 50 and over is unchanged at $6,500.
The maximum possible contribution for defined contribution plans (e.g., for a self-employed person with a sufficiently high income contributing to a solo 401(k)) is increased from $58,000 to $61,000.
Health Savings Account Contribution Limits
For 2022, the maximum HSA contribution for somebody with self-only coverage under a high deductible health plan is $3,650. The limit for somebody with family coverage under such a plan is $7,300.
Capital Gains and Qualified Dividends
For 2022, long-term capital gains and qualified dividends face the following tax rates:
- 0% tax rate if they fall below $83,350 of taxable income if married filing jointly, $55,800 if head of household, or $41,675 if filing as single or married filing separately.
- 15% tax rate if they fall above the 0% threshold but below $517,200 if married filing jointly, $488,500 if head of household, $459,750 if single, or $258,600 if married filing separately.
- 20% tax rate if they fall above the 15% threshold.
Alternative Minimum Tax (AMT)
The AMT exemption amount is increased to:
- $75,900 for single people and people filing as head of household,
- $118,100 for married people filing jointly, and
- $59,050 for married people filing separately.
The estate tax exclusion is increased to $12,060,000 per decedent.
Pass-Through Business Income
With respect to the 20% deduction for qualified pass-through income, for 2022, the threshold amount at which the “specified service trade or business” phaseout and the wage (or wage+property) limitations begin to kick in will be $340,100 for married taxpayers filing jointly and $170,050 for single taxpayers, people filing as head of household, and for married people filing separately.
No one wants to pay more taxes than they have to or need to. We want to pay Aunt IRS what we owe but we don't want to leave a tip. Your retirement distribution strategy should consider your income tax situation.
You Need A Plan
A goal of retiring - without a plan - is simply a plan to run out of money. At 80/20 Financial Services our mission is to increase your time, money and peace of mind by helping you create an income and investment plan that outpaces inflation and aligns with your retirement goals while guiding you through the completion of that plan year after year.
If you are retired or nearing retirement, we can create a plan which will outpace inflation and accomplish any other retirement goals you might have. The consultation is free and without obligation. Contact us to set up a consultation.
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