Every tax season, taxpayers look to see if new marginal tax rates have been added to the brackets. Although new tax rates would only affect those that are at the top of the tax tables, it’s still something that worries many taxpayers.
For the time being, the new tax brackets for the 2022 tax season, which you will file a federal income tax return for the income earned in 2021, the IRS hasn’t added new marginal tax rates. This means that the tax rates continue to be at 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.
Before the announcement of the Internal Revenue Service’s inflation and changes to the cost of living adjustments, the tax hike was in the talks for a while. Even when Biden was campaigning, there was a lot of mention that you will pay a higher tax than now if you’re earning more than $400,000. Luckily for some, it didn’t happen, and the tax rates for the 2022 tax season are the same as usual.
Figure out your tax rate
The tax rates mentioned above are the marginal tax rates. It’s good to differentiate them. You, as a taxpayer, won’t pay the highest percentage that applies to you. At least for your whole income. You will pay 10 percent for the income specified in that bracket and 12 percent for income between the minimum of that bracket and highest, and 22 percent for income between the minimum of that bracket and highest, and so on. In a way, you can think of them as pockets that you fill gradually, and the bigger the bag, the more Uncle Sam takes.
Here is an example to help you figure out how to calculate your tax rate.
Assume you’re married and filing a joint return with your spouse with a combined taxable income of $75,000. In that case, the highest tax rate for you is 12 percent. The following shows how that works.
You will pay 10 percent for income up to $20,550.
You will pay 12 percent for income between $20,550 and $75,000.
10 percent of $20,550 = $2,055
12 percent of $54,450 ($75,000 – $20,550) = $6,534
Your total tax liability is $8,589 in that case.
Your tax bill is reduced with the tax credits that you claim. That’s assuming you qualify for tax credits, of course. The most popular tax credits, like the child tax credit, are available for most taxpayers. If you have children under the age of 18, you can get up to $3,500 in child tax credit which is also entirely refundable, adding up to your tax refund if you don’t have a tax liability.
Tips on paying less tax
People use many ways to avoid taxes on their income, like investing in assets like stocks, real estate, or other properties. One of the best ways to help you reduce tax bill is to invest in a traditional IRA. Since the likelihood of you paying less tax in retirement is higher, you can avoid taxes altogether and pay when based on your withdrawals when you retire. If you think it will happen the other way around, invest in Roth IRA instead.
Although these mean you will eventually pay taxes, with the goal of paying less tax in mind, you will get there. Learn more about how to manage your taxes on our homepage.