2022 Tax Brackets Simplified
To comprehend the U.S tax system before anything we must understand that it is not a coincidence that it’s complicated. The system rewards and encourages the taxpayer to do its homework and play the game as smart as possible. Those who don’t, get the back end of the deal.
What are Tax Brackets?
Tax Brackets are the different levels of taxation an entity is subject to depending on the amount of their income.
How did the Tax Bracket start?
Although taxation in the U.S has a long and complex history, the progressive taxation system as we know it today started around 1913 with the “Revenue Act”.
Tax Brackets are subject to inflation. Since the economy suffers from it each year, the levels are increasing as well.
A great way to simplify the way tax brackets work is to see them as an empty upside down layered cake. As we fill up the different layers of the cake with our income, we enter a new bracket which has a new taxation percentage.
Here is an Image to put it in perspective: (All Charts use Data of Single Filers)
How do you know how much you have to pay?
Let’s say that in 1913 you made $65k. Some may assume that if $65k is in the third bracket we pay 3% on all that income, yet it doesn’t work like this. The first $20k was taxed at 1%, so for the first layer of the cake you pay $200. However, since $20k only fits in the first layer what remains must go on to the next layers. Remember that you must fit all the income you had, so the next $30k gets taxed at a rate of 2% which equals $600. You’ve already filled the cake up to $50k and there’s $15k left that will go in the next layer. Those $15k will get taxed at 3% which equals $450. To know what your tax duties were for $65k in 1913 you must add what you paid at each layer, which comes to the great sum of $1,250.
Unfortunately, as inflation increased year by year, so did the tax duties and the amount of income that fit on each layer of the cake decreased. This was good for the government and not for the individual taxpayer.
Time has passed and The Internal Revenue Service adjusts the brackets to the cost of living and inflation.
This is the bracket for the year 2022(Single Filers). Watch the difference between the year before and the year after.
We can see that there is a significant increase.
How can we fit more of our income into each bracket, so we pay less taxes?
The Internal Revenue Service to aid the taxpayers provides multiple strategies to create tax savings. Tax-Evasion is illegal; however, Tax-avoidance is encouraged by the IRS.
The tax-savings vehicles that the IRS offer individuals are Exclusions, Deductions, Credits and Adjustments. All these strategies have lots of requirements that the taxpayer must follow to use them efficiently.
To summarize, tax brackets are the different levels of taxation that there is depending on how much income is reported. As the years pass the brackets get adjusted with the inflation. To fit more income into the layers of the cake, we can use tax strategies that will create tax savings.