Marginal Tax Brackets and the Impact of Your Take-Home Pay

If you thought your tax bracket was safe for another year, think again! The brackets are adjusted each year to account for inflation, which means you could end up in a different tax bracket in 2022 and 2023.

But first, let’s break down down the basics.

What is a marginal tax bracket?

A tax bracket is the range of incomes that are taxed at a particular rate. The United States has a progressive tax system, which means that people with higher incomes are taxed at a higher rate than those with lower incomes.

The term “bracket” refers to the taxable income range corresponding to a certain tax rate.

 Every tax bracket has a maximum and minimum taxable income threshold, which are the points at which the tax rate applies to all income within that bracket.

There are seven federal tax brackets, ranging from 10% to 37%.

2022 Tax RateTaxable Income (Single)Taxable Income (Married Filing Jointly)
10%Up to $10,275Up to $20,550
12%$10,276 to $41,775$20,551 to $83,550
22%$41,776 to $89,075$83,551 to $178,150
24%$89,076 to $170,050$178,151 to $340,100
32%$170,051 to $215,950$340,101 to $431,900
35%$215,951 to $539,900$431,901 to $647,850
37%Over $539,900Over $647,850
2022 Tax Brackets for Single Files and Married Couples Filing Jointly

The exact income ranges for each tax bracket depending on your filing status. For example, for the 2022 tax year, the income range for the 10% tax bracket is $0 to $10,275 for single filers and $0 to $20,550 for married couples filing jointly.

The good news is that you don’t have to pay taxes on all of your income. The tax bracket thresholds are the income levels at which the tax rates kick in, but they’re not the same as the actual amount of taxes you owe. Only the portion of your income that falls into a given tax bracket is taxed at that rate.

Progressive taxes in practice

For example, let’s say you’re a single filer with an annual income of $50,000. That puts you in the 22% tax bracket, which applies to incomes between $41,776 to $89,075. But that doesn’t mean you’ll owe $11,000 in taxes ($50,000 x 22%).

Instead, your tax bill will be a bit lower. That’s because you’ll only owe 22% on the portion of your income that exceeds $41,776. The rest will be taxed at lower rates. So, using the 2022 tax brackets, you would owe 10% on the first $10,275 of your income ($1027.50), 12% on the next $41,775 ($3779.88), and 22% on the remaining $8,224 of the $50,000 ($1809.28). Your total tax bill would be $6,616.66. (This does not account for any credits or deductions.)

Of course, your tax situation is likely to be more complicated than this example. But it illustrates how the progressive tax system works in practice.

History of the marginal tax brackets

When the Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017, it considerably reduced the previous marginal tax bands. 

The last highest individual tax bracket, which had a rate of 39.6%, was reduced to a new top speed of 37% due to the TCJA. 

In addition, the new law altered the percentage of your annual income subject to the new tax rates and the number of different tax bracket levels. 

Marginal t backax rates are scheduled to go up in the future

If you thought your income taxes would stay low forever, think again. The Tax Cuts and Jobs Act of 2017 changed the federal income tax rates to what they are now. However, the new rates are only temporary – they expire after 2025. So, starting in 2026, the tax rates are scheduled to revert back to the previous rates, which were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

When deciding how much money to put into your 401(k) or any other tax-advantaged accounts, you should consider this factor before the end of the year because it affects the amount of money you bring home. 

Let’s take a more in-depth look at these changes and what they imply for you in the future. You’ll be glad you did!

How adjusting for inflation impacts your marginal tax rate between 2022 to 2023

If you’re like most people, the thought of dealing with the IRS is about as appealing as a root canal. But whether you love or hate them, the IRS is an important part of our lives – especially when it comes to our taxes.

One of the ways the IRS affects us is by adjusting for inflation. Inflation is the rate at which prices for goods and services rise over time. The IRS uses a measure of inflation called the Consumer Price Index (CPI) to make sure that our taxes keep pace with the cost of living.

For example, let’s say the CPI rises by 2% in a year. That means that prices have gone up by 2% on average. In order to keep up with inflation, the IRS will adjust tax brackets and other amounts by the same 2%.

So what does this mean for you? Let’s take a look at the new tax brackets.

2023 Tax RateTaxable Income (Single)Taxable Income (Married Filing Jointly)
10%Up to $11,000Up to $22,000
12%$11,001 to $44,725$22,001 to $89,450
22%$44,726 to $95,375$89,451 to $190,750
24%$95,376 to $182,100$190,751 to $364,200
32%$182,101 to $231,250$364,201 to $462,500
35%$231,251 to $578,125$462,501 to $693,750
37%Over $578,125Over $693,750
2023 Tax Brackets for Single Filers and Married Couples Filing Jointly

When a bracket gets wider or difference between the bracket’s lowest dollar amount and its highest dollar amount is bigger, there’s less of a chance that you’ll end up in a higher tax bracket if your income stays the same or doesn’t grow at the rate of inflation from one year to the next.

How Does This Impact Take-Home Pay?

The IRS has announced that the tax rates and brackets for 2023 will remain the same as they were in 2022. So if you were in the 10% bracket last year, you’ll still be in the 10% bracket this year. And if you were in the 35% bracket, you’ll still be in the 35% bracket.

However, the tax brackets themselves will be different. The IRS adjusts the brackets each year to account for inflation. As a result, you could end up in a different tax bracket in 2023 than in 2022. That, of course, also means you could pay a different tax rate.

So what does that mean for your take-home pay? It all depends on how much you make and where you fall in the tax brackets. You may not see any difference in your taxes if you’re in a lower bracket. But if you’re in a higher bracket, your taxes could go up or down depending on how much your income has increased (or decreased) from last year.

Lowering your tax rate by saving for retirement

If you’re looking to reduce your tax burden, contributing to a 401k can be a great way to do it. By contributing to a 401k, you’re essentially putting money into a retirement account that you won’t be able to access until you retire. This means that the money you contribute will not be subject to taxation until you withdraw it in retirement. This can be a great way to reduce your overall tax burden.

What Does This Mean for Tax-Advantaged Accounts?

One of the most significant alterations that the Tax Cuts and Jobs Act (TCJA) brought to the tax law was an increase in the maximum amount that could be deposited to a 401(k). This maximum amount was raised to $19,000 for an individual and $25,000 for a married couple filing jointly. 

This increase in the 401(k) contribution limit was to encourage people to save more money for their retirement. 

According to the latest 401k contribution limits from the IRS, you can contribute up to $19,500 in 2022 and $20,500 in 2023. So if you’re looking to max out your contributions for the next year, you’ll need to start saving now!

You should be aware that the newly implemented tax rates and brackets may have an effect on the amount of money that you keep in your pocket after taxes. You should consider how much of your new take-home pay to put into the retirement plan that your employer offers. 

If you contribute more money to your 401(k) right now, you may wind up paying less in taxes in the future. How much less depends on the amount of money you contribute and the average rate at which you are taxed in future years. 

Keep in mind that the recent tax reform brought about some significant changes to retirement funds, and keep this in mind as you assess your options. 

The increase in the annual contribution limits for certain retirement plans, such as 403(b) plans for certain employees of state and local governments and 401(k) plans for the majority of employees in the private sector, is one of the most notable changes that has taken place as a result of these reforms.

Taxes and retirement savings

The new bracket thresholds should be a consideration when deciding how much to contribute to a 401(k) or another retirement account. 

The revised tax rates affect the amount you should save for the upcoming year. While higher rates may seem like a deterrent to saving, they are expected to increase the demand for retirement products like 401(k) plans, which means greater demand and lower costs for investors.

Depending on how much you contribute and the rate you are taxed in future years, you may pay less in taxes by contributing more to your 401(k) now. 

401k Contribution Limits

But what if you’re not looking to max out your contributions? Well, the good news is that you don’t have to. You can start contributing to your 401k at any age and with any amount of money. So if you’re just starting out, don’t feel like you need to wait until you have a huge salary to start saving.

What if your company doesn’t offer a 401k in the employee benefits?

If you’re looking for a way to save money on taxes, an IRA can be a great option. By contributing to an IRA, you can deduct your contributions from your taxable income. This can help you save money on taxes in the long run.

There are two types of IRAs: traditional and Roth. With a traditional IRA, you can deduct your contributions from your taxable income in the year you make them. With a Roth IRA, you can withdraw your contributions tax-free at retirement.

Which type of IRA is right for you depends on your individual circumstances. If you’re looking for a way to save money on taxes, an IRA can be a great option.

Summary

The governmental tax system saw major modifications as a result of the Tax Cuts and Jobs Act, along with the marginal tax brackets, and adjustments from the IRS due to inflation.

The 2017 brackets are lower for all taxpayers and apply to a larger portion of each person’s income. These changes impact your take-home pay in a few ways. 

First, your income is liable to the marginal tax rates that apply to the lowest tax brackets. 

Second, you may have a larger amount of taxable income in lower tax brackets under the new system. 

The amount you should set aside for the future is likewise impacted by these new rates. If your take-home pay is larger, this means that you will be able to set aside more. You should likely also consider doing so.

Inflation and marginal tax rates summary

The Internal Revenue Service (IRS) adjusts for inflation by widening marginal tax brackets. This means that your take-home pay is effectively increased each year. However, this does not always keep pace with the cost of living, so you may still feel like you’re falling behind.

One way to combat this is to make sure that you’re taking advantage of all the deductions and credits that you’re entitled to. This can help to offset the impact of inflation on your taxes.

Another way to reduce the impact of inflation on your taxes is to invest in index funds or other investments that are linked to inflation. This can help you keep pace with the rising cost of living and minimize the impact on your take-home pay.

Finally, remember that you can always talk to a tax professional if you have any questions about how inflation is affecting your taxes. They can help you understand the best way to minimize its impact and make sure that you’re getting the most out of your tax return.

Depending on the amount of money you contribute and the rate at which you are taxed in future years, you may pay less in taxes by contributing more to your 401(k) or IRA now.

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