Tax Brackets and Marginal Tax Rates
The 2022 tax brackets have not changed. However, that doesn’t mean you will be paying the same tax for 2022 as you did in 2021.
There are seven levels of tax that may be paid depending on the amount of taxable income you have. Those seven brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. What has changed are the limits that dictate what bracket you fall under. Those limits for 2022 have been adjusted for inflation, so even if you made the same amount of money, you could be paying a different amount of tax.
Where you fall in those tax brackets also depends on whether you are filing as single, married and filing jointly with your spouse, married but filing separately, or as head of household.
If your 2022 income remains about the same as in 2021, and you were just over the line into a higher tax bracket, you now fall under the lower bracket, but that may not lead to as much savings as you may think.
If you are single and make $80,000, that would put you into the 22% tax bracket. You may think that means you would be paying 22% of $80,000, or $17,600. That isn’t how the tax brackets work. The highest tax rate does not apply to all your taxable income. These brackets are marginal rates. In 2022, the 22% tax bracket for single adults is from $41,776 to $89,075, so if you make $80,000, only the amount from $41,776 and above is taxed at that rate. Income up to $10,275 is taxed at 10% and income from $10,276 to $41,775 is taxed at 12%.
Tax from income up to $10, 275 is taxed at 10% is $1,027.50
Tax from income from $10,276 to 41,775, or the next $31,500 is taxed at 12%, or $3,780.
The remaining income from $41,776 to $80,000 is taxed at the 22% rate, so only the last $38,225 is taxed at 22%, or $8,409.50.
So instead of the $17,600 in tax, you would owe $1,027.50 plus $3,780 plus $8,409.50 for a total of $13,217. A difference of $4,383.
So, obviously, this example is very simplistic since we did not discuss anything related to deductions, exemptions, or different types of income that are taxed differently, such as capital gains. The point of this simple exercise was to point out how tax brackets work and what a marginal tax rate means for you. There is a misconception among people that being in a certain tax bracket means all your income is taxed at the same rate. If that were the case, the amount of taxes people paid would be significantly higher the more they make when the truth is that everyone pays tax on the same scale. Obviously, the more you make, the more you pay, but with marginal tax rates, you only pay the higher rate on the amount above the threshold for that specific tax bracket.