Every year, the Internal Revenue Service announces new tax brackets among other crucial credits and deductions that determine your tax rate for the upcoming year. This is done to account for inflation which varies from year to year.
If the IRS didn't adjust the federal income tax brackets for inflation you'd likely end up in a higher tax bracket since salaries are often adjusted for inflation. This is known as "bracket creep" since the raise likely doesn't leave you feeling richer because the cost of living rose, yet you'd find yourself paying more taxes.
Even though tax brackets change each year, higher-income people always will fall under higher tax brackets than lower-income people.
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Tax bracket definitionA tax bracket is the range of incomes subject to a particular income tax rate. In the U.S. there are seven different tax brackets.
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2022 tax bracketsThe IRS uses the average year-over-year chained consumer price index readings for 12 months beginning in August of the prior year through September to make inflation adjustments for the upcoming tax year. The chained index tends to rise more slowly than CPI because it takes into account the substitutions consumers make in response to higher prices.
The procedure the IRS follows does "a pretty good job" of accounting for increased prices, said Robert McClelland, a senior fellow at the Urban-Brookings Tax Policy Center. However, it does not account for increased wages.
That means that if you got a raise to keep up with inflation you'll likely face the same tax rate as the prior year, all else equal. If your salary rose by more than the rate of inflation you may fall under a higher tax bracket. But if your wages didn't keep up with inflation, which was the case for the average American worker in 2022, you could end up in a lower tax bracket compared to 2021.
It's not much of a savings though, McClelland said. The inflation-adjusted brackets "aren't addressing the fact that your real income fell," meaning your income could cover fewer goods and services due to inflation throughout the year.
"You're actually worse off even though your taxes may be lower," McClelland said.
What is the highest tax bracket?The highest individual tax bracket is 37% for people who earned more than 539,000 in 2022.
2022 tax bracketsThe 2022 tax brackets for people filing individual returns are:
37% for incomes greater than $539,900.
35% for incomes over $215,950.
32% for incomes over $170,050.
24% for incomes over $89,075.
22% for incomes over $41,775.
12% for incomes over $10,275.
10% for incomes $10,275 or less.
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Married filing jointly tax bracketsThe 2022 tax brackets for married couples filing joint returns are:
37% for incomes greater than $647,850.
35% for incomes over $431,900.
32% for incomes over $340,100.
24% for incomes over $178,150.
22% for incomes over $83,550.
12% for incomes over $20,550.
10% for incomes $20,550 or less.
Head of household tax bracketFor tax purposes, the IRS generally defines a head of a household as the parent who pays for more than half of their household's expenses. Heads of households have higher income thresholds for each tax tax bracket than individual filersto account for the additional costs they cover.
The heads of household tax brackets for 2022 are:
37% on the portion of income above $539,900 plus an additional $161,218.50.
35% on the portion of income above $215,950 (but not over $539,900) plus an additional $47,836.
32% on the portion of income above $170,050 (but not over $215,950) plus an additional $33,148.
24% on the portion of income above $89,050 (but not over $170,050) plus an additional $13,708.
22% on the portion of income above $55,900 (but not over $89,050) plus an additional $6,415.
12% on the portion of income above $14,650 (but not over $55,900) plus an additional $1,465.
10% on income below $14,650.
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The thresholds for each of the seven tax brackets increased. For instance, the income threshold for the top tax rate, 37%, increased by $16,300 for individual filers in 2022 from 2021.
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Federal tax brackets for 2023Even though 2023 only just started, the IRS already released tax brackets for the year that will be filed in 2024. Importantly, the tax brackets were based on the average annual chained consumer price index values each month from August 2021 to September 2022, a period of historically high inflation.
This means that even if inflation continues to drop this year, the income thresholds in 2023 tax brackets will remain higher. On the flip side, the 2022 tax brackets were based on inflation data from 2020 to 2021 which was much lower than the inflation rate we experienced in 2022.
For the top individual tax bracket, the 2023 income threshold was raised to above $578,125 versus $539,900 in 2022. This means that nearly $40,000 in individual income will be taxed at 35% instead of 37%.
Here are the other 2023 tax brackets for individual filers:
35% for incomes over $231,250.
32% for incomes over $182,100.
24% for incomes over $95,375.
22% for incomes over $44,725.
12% for incomes over $11,000.
10% for income below $11,000.
2023 tax brackets for married couples filing joint returns are:
37% for income greater than $693,750.
35% for incomes over $462,500.
32% for incomes over $364,200.
24% for incomes over $190,750.
22% for incomes over $89,450.
12% for incomes over $22,000.
10% for income below $22,000.
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How can I lower my tax bracket?There are a lot of different ways you can lower your tax bracket. If you're married, filing a joint return with your spouse could qualify you for a lower tax bracket. Or depending on your income and circumstances, you may lower your tax bracket by filing an individual return.
Another way to lower your tax bracket is by contributing to a 401(k) if your employer offers one. This will lower your taxable income which can put you in a lower bracket. If your employer doesn't have one, contributions to a traditional Individual Retirement Arrangement could help you qualify for a tax deduction which could also help lower your bracket.
You may also want to run the numbers on taking the standard deduction instead of itemized deductions since it could put you in a lower bracket, depending on your financial situation.
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Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here
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