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Tax bracket is a topic the majority would avoid, but crucial during times when your income can’t cope with inflation.
The US adopts a progressive tax system for single filers, married couples filing separate or joint returns, and heads of households. You will likely be exempt from paying higher taxes due to the increase in tax brackets.
What’s a Tax Bracket?
A tax bracket shows the tax rate you must pay on a portion of your taxable income. Depending on the filing status of a progressive individual or corporate income tax, the rates rise as income increases.
Those that fall under the lower bracket are taxed lower, while the high earner is taxed higher with multiple rates.
2022 Tax Brackets
The IRS bases the average chained consumer price index (CPI) reading starting August 2021 to September 2022. The year-over-year inflation adjustment is made for the upcoming tax year on April 2023.
- 10% – for incomes up to $10,275 single filers, head of house holds $14,650, married couples filing jointly $20,550
- 12% – for incomes up to $41,775 single filers, head of house holds $55,900, married couples filing jointly $83,550
- 22% – for incomes up to $89,075 single filers, head of house holds $89,050, married couples filing jointly $178,150
- 24% – for incomes up to $170,050 single filers, head of house holds $170,050 married couples filing jointly $340,100
- 32% – for incomes up to $215,950 single filers, head of house holds $215,950, married couples filing jointly $431,900
- 35% – for incomes up to $539,900 single filers, head of house holds $539,900, married couples filing jointly $647,850
- 37% – for incomes up to $539,900++ single filers, head of house holds $539,900++, married couples filing jointly $647,850++
source: IRS.gov
2023 Tax Brackets
The IRS released the tax brackets based on the annual chained consumer price index values from August 2021 to September 2022. The filing is in April 2024.
- 10% – for incomes up to $11,000 single filers, head of households $15,700, married couples filing jointly $22,000
- 12% – for incomes up to $44,725 single filers, head of households $59,850, married couples filing jointly $89,450
- 22% – for incomes up to $93,375 single filers, head of households $95,350, married couples filing jointly $190,750
- 24% – for incomes up to $182,100 single filers, head of households $182,100 married couples filing jointly $364,200
- 32% – for incomes up to $231,250 single filers, head of households $231,250, married couples filing jointly $462,500
- 35% – for incomes up to $578,125 single filers, head of households $578,100, married couples filing jointly $693,750
- 37% – for incomes up to $578,125++ single filers, head of households $578,125++, married couples filing jointly $693,750++
source: IRS.gov
How Do Tax Brackets Work?
The tax system makes higher-income earners pay a high federal income tax rate while the lower-income earner pays a low federal income tax rate. Your taxable income is divided into chunks with a corresponding tax rate and not based on your entire income.
What Is Marginal Tax Rate?
The tax rate on your last dollar of paid taxable income is called a marginal tax rate. It is the additional tax paid for every extra dollar earned as income. The goal is for the wealthiest taxpayers to pay a larger share while lightening the load for the lowest-income earner.
How Can You Lower Your Tax Brackets?
The federal tax law allows you to lower your taxable income by using these strategies for tax deductions:
1. Contribute More to Retirement Accounts
Set aside $20,500 in retirement accounts which are not taxed until you withdraw it. People 50 years or older can make a catch-up contribution of $6,500.
There’s a simple IRA contribution of $14,000 with a catch-up contribution of $3,000 and a traditional IRA limit of $6,000 plus a catch-up contribution f $1,000 for a non-working spouse.
2. Push Asset Sales to Next Year
Holding your asset for more than a year will qualify you to pay capital gains tax from 0%, 15%, and 20% based on your taxable income. Unlike short-term capital gains, this is taxed at the regular marginal income tax rate. Limit your investment income per year and avoid the Net Investment Income Tax of 3.8%.
3. Batch Itemized Deductions
Batch deductions are declared within the tax year and may exceed the standard deductions. Donate the appreciated stocks or shares from investment gains instead of selling the investment to avoid paying the capital gains tax.
4. Sell Losing Investments
Liquidate a devalued investment to offset this from an appreciated asset or stock. You can deduct $3,000 in realized investment losses per year on a depreciated asset to ordinary income.
5. Choose Tax-Efficient Investments
Investing in tax-free or tax-deferred investments can reduce taxes, stocks, individual bonds, exchange-traded funds, mutual funds, low turnover funds, and index funds. Municipal bonds are tax-free at the federal level, while federal bonds are tax-free at the state level.
Final Thoughts
Plan your investment strategy by using tax deductions and tax credits to lower the amount you pay the government. Know your tax bracket as part of your tax optimization to help you decide on opportunities for increasing your income while reducing your tax liabilities.
This article originally appeared on Financially Well Off.
