The Internal Revenue Service (IRS) uses tax brackets to make sure that people who earn more money pay more in taxes. Each tax bracket has a rate that is applied to taxable income that falls within a certain range.
In the US, your tax liability is calculated using federal income tax brackets. Your taxable income determines which tax brackets you fall under the IRS and the federal income tax rates that apply to various income levels. In 2022, there are seven brackets with percentages between 10% and 37%.
IRS Taxes Adjust Gross Income
After subtracting deductions, credits, and exemptions, the IRS applies tax brackets to your adjusted gross income. However, tiered tax rates only apply to income within a bracket. Only the first $10,275 of taxable income is taxed at 10%. The rest is taxed according to the bracket.
The agency changed many 2023 tax rules to prevent “bracket creep.” Cost-of-living adjustments to offset inflation push workers into higher tax brackets, even though their standard of living hasn’t changed. For 2023, the IRS raised each provision by 7%.
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Tax Savings For Some Taxpayers
According to Tim Steffen, director of tax planning with Baird, a married couple making $200,000 in 2022 and 2023 would, for instance, save $900 in taxes this year because more of their income would be taxed at a lower rate.
Given that the expiration of pandemic tax credits is anticipated to cause many Americans to experience a “tax refund shock” with this year’s tax returns (for the 2022 tax year), this could be a welcome change. Refunds may therefore be much less in 2023 than they were the previous year.
Though, according to the Tax Policy Center, a think tank that focuses on taxes, not everyone will benefit from the changes to tax brackets, particularly those whose incomes increased by at least 7%. In early 2024, taxpayers will file their 2023 tax returns.
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