In the American tax filing system, we use tax brackets to determine the amount of taxable income someone owes, and at what percent. There are seven total tax brackets. A common misconception of tax brackets is that you pay the percent calculated for your total taxable income. In this blog we will jump into an easy explanation on how tax brackets work and how you can use them to estimate your own income tax.
History of Tax Brackets
Taxes in the United States started in the 1760s before the American Revolution. The British had a taxation policy on all imported goods. After much revolt, the American government seceded from Britain and took taxes into their own hands. The United States income tax first originated during the Civil War as a means for revenue. However, the official federal income tax wasn’t enacted until 1913. Taxes have been a mode of political debate since these times. Tax brackets act as a variation for income levels so that everyone pays based on the income that they make, rather than a standard rate for everyone. While many think that the progressive tax system is the best and fairest way to do it, others believe that a flat tax rate is more equitable. Tax rates historically either increase or decrease depending on which political party is in office. In the long term, the tax rates will likely continue to go up due to inflation.
What is a Tax Bracket?
A tax bracket refers to a range of taxable income that will be taxed at a certain rate. We use a progressive rate which means as a person’s taxable income increases, their tax rate increases. The IRS accommodates these rates every year depending on the cost of living and the budget of the federal government. This means that the 2022 tax brackets will not be the same as 2021 tax brackets. Currently the U.S. is experiencing the highest inflation in 30 years. This inflation will contribute to the higher tax brackets for 2022. Therefore, many Americans will be paying higher income tax than before. However, deductions and exemptions can reduce your taxable income and therefore help you pay less in taxes. See figure below for year 2022 tax brackets.
Marginal Tax Rates Explained
Now that we have discussed the common misconception with tax brackets, how tax brackets work, and explained the progressive system we use today; let’s look at this example. Here is how tax brackets work in the calculation of your tax liability.
This is an example of someone who has a $90,000 taxable income. You’ll notice that the percentages match with the 2022 tax brackets. In this example, all the income up to $10,275 will be taxed at a rate of 10%. Then, all income above $10,275 but below $41,775 will be taxed at a 12% rate. This goes all the way up to the highest tax bracket that your taxable income falls into, which is called your marginal tax rate. Below is a quick calculation of the income taxes due from this example.
10% of $10,275 = $1,027.50
12% of $31,499 = $3,779.88
22% of $47,300 = $10,406.00
24% of $934 = $221.76
Total taxes due = $15,435.14
There are different tax brackets for married, and single taxpayers as well. This changes the rates and the taxable income. Because you and your spouse are calculated as one, your 10% tax will be at a higher taxable income. Just because your income falls into a certain tax bracket, it doesn’t mean that all that income is taxable. There are credits that can be taken and reduce your overall tax liability. Therefore, it is important to speak with an accountant about your needs and how to better accommodate your personal situation.
How to lower your tax bracket and pay lower taxes
1. Tax Credits: These can reduce your overall tax bill on a dollar-for-dollar basis.
Here are some examples of common tax credits for individuals.
~ child tax credit
~dependent care credit
~other dependent tax credit
~adoption credit
~saver’s credit
~foreign tax credit
~residential energy officiant property credit
~plug in electric drive vehicle credit
~education credits
2. Tax Deductions: Deductions help lower your taxable income, which in turn decreases your tax liability.
Here are some examples of common tax deductions for individuals
~standard deduction (this is the general deduction given to all taxpayers who are not qualified to itemized deductions)
~itemized deduction (State and local income tax, property tax, real-estate tax, sales tax, charitable contributions, gambling losses, interest expense, home mortgage interest, medical and dental expenses)
~self-employed business expenses
~student loan interest deductions
~teacher educational expenses
Tax brackets can be a little difficult to understand so hopefully this blog provided you with a substantial amount of information. Regardless, the best way to ensure your understanding is to make sure you speak with an accountant about your personal situation. There are changes every year, and an accountant can clear up any confusion you may be having. These last couple years have been crazy, and 2022 has faced a brutal inflation. Your accountant may offer guidance on your taxes and personalize your plan for you. Using your resources is essential to being a responsible taxpayer. Access Tax and Accounting offers tax services in the following areas 75904, 75949, 77069, 77701, 77042, 75701, 75702, 75001, 77004, 76006, 76039, 75038, 75961, 77375, 77086, 77377, 77066, 75652, 77429, 77433, 77035, 77386, 77449, 77088, 77304, 77379, 75071, 76040, 77027, 77070, 77381, 77351. Feel free to reach out and get a free consultation today, our professionals will be more than happy to assist you. We provide live virtual consultations for all clients in the zip codes mentioned, as well as anywhere in the United States.