Do You Know What Tax Bracket You Are In?

by | Jan 17, 2023 | Blog

The beginning of the year means… tax time! If your income fluctuated in 2022 that means your tax bracket may have changed. So be sure to dig out and review all of your relevant documentation like last year’s tax return, your Form W-2, your latest paystubs, and whatever else ya got!

Most tax preparers will provide a list of documents they’ll need from you each season.  But, if you do things on your own, the IRS offers a good breakdown of what you should have in your records.

Why is Knowing Your Tax Bracket Important?

Understanding taxes at a basic level is crucial to getting a grasp on your personal financial situation. You don’t have to have in depth knowledge but you should at least know some lingo. And if you are one of those people who just sees the direct deposit hit your bank account every two weeks, you may not realize how your money is being taxed. Which can lead to an unexpected surprise come tax time.

So let’s start with the basics. A tax bracket is a range of income that is taxed at a certain percentage. There are 7 brackets for 2022, which we’ll outline below. Generally the more income you have, the more tax you typically pay. This is called a progressive tax system.

Knowing which bracket you fall in tells you how each of your dollars gets taxed.

Reminder: Tax Brackets are Marginal

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 a single filer who made $41,775 in 2022, your first $10,275 will be taxed at 10%. The next portion of your income will be taxed at an increased rate; from $10,275 to $41,775, your tax rate will be 12%.

A common tax misconception is that if you are in the 35% tax bracket, that means all of your money is taxed at 35%. That’s not how it works. To find out what you actually paid in taxes, go here to find out how to to calculate your effective tax rate.

Why Would My Tax Bracket Be Different?

The IRS is always adjusting tax rates and brackets for inflation. As inflation eats away at your purchasing power over the years, the IRS accounts for that and adjusts the brackets accordingly. This helps to avoid bracket creep.

What is bracket creep? Bracket creep occurs when inflation pushes your income into a higher tax bracket. In this scenario, an individual may not actually have increased purchasing power or greater disposable income, even with an increase in wages and salaries.

This is why the income ranges applied to each tax bracket are adjusted to inflation. While the brackets themselves have remained steady the last couple of years, the income ranges applied to each bracket have been adjusted upward to account for inflation. For example, the 10% tax bracket for a single filer in 2020 went up to $9,875, $9,950 in 2021 and $10,275 in 2022.

2022 Tax Brackets

Without further ado, here are the 2022 tax brackets according to your filing status and income from the IRS.

It is important to know basic tax concepts like this because you will be filing taxes for as long as you live. The sooner you get your arms around your tax situation, the easier it will be to plan for as life changes. It’s especially important for retirees taking withdrawals from their retirement accounts, or for someone who wants to take advantage of a Roth conversion in a lower earning year.

The hope with understanding what tax bracket you are in is that you will never be surprised come tax time. The best tax strategies are actually implemented throughout the year, not just when filing the return. And the best place to start is the basics.

So when you get your return this year, be sure to actually look at it and see how each dollar of your hard-earned money is being taxed.

Please note that these are marginal rates for federal taxes and do not take in to account state taxes.

Join our Newsletter

Mullooly-Main-Logo

Future-Proof Your Finances

Download the 25-Year Success Strategy

 
Enter your email & get this free PDF download to help you prepare for the next 25 years.  We will send periodic updates as well. Unsubscribe at any time.

You have Successfully Subscribed!

Share This