Here’s how 2022 tax brackets actually work

Written by

Trent Hamm, Contributing Writer

Trent Hamm
Contributing Writer

Contributing Writer

Full Bio

on December 14, 2021

| Topic: Taxes

Tax brackets are one of the most commonly misunderstood aspects of taxes in America. News reports about taxes often do little to clear up those misunderstandings, sometimes making it seem that people are going to owe a much larger portion of their income to taxes than they actually do.

Tax brackets aren’t that difficult to understand, particularly if you can visualize a multi-tiered water fountain in your head. Let’s dive in.

2022 income tax brackets

Source: Internal Revenue Service

Expressed like this, tax brackets are easy to misunderstand. The most common misunderstanding is that these represent how much you’ll pay on all of your income. If your total income puts you in a particular tax bracket, that is not the percentage you pay on all of your income. It is how much you pay on just that portion of your income. On other portions, you’ll pay a much lower tax rate.  

How 2022 tax brackets work

The best way to visualize tax brackets is to think of a tiered water fountain. There’s a small cup at the top where the water begins. It fills up that small top cup, then the water overflows, down to a bigger cup. That one fills up and overflows down to the next cup, and so on down to a big pool at the bottom.

[ See: 6 Common Tax Misunderstandings, Explained ]

That’s almost exactly how tax brackets work. 

Imagine you’re a single person, and your income is like the water in this fountain. You pour all of your taxable income into the top cup of this fountain, the 10% cup. Once you’ve poured in $10,275, that 10% cup is now overflowing, and the excess flows down into the 12% cup. Once you’ve poured in $41,775 in total, that 12% cup is now overflowing as well, and the excess pours down into the 22% cup. Once you’ve poured in $89,075 in total, that 22% cup is now also overflowing, so the excess pours down into the 24% cup. It keeps going like this until you’ve poured in $215,950 in total, at which point any additional income that you pour in goes into the 35% cup.

So, you end up with your income spread across a bunch of different cups. You have some in the 10% cup, some in the 12% cup, and so on.

For the portion of your money that’s in each cup, you only pay the percentage tax rate for that specific cup. If you have $10,275 in that 10% cup, you only pay a 10% tax on that portion of your income. If you have $20,000 in the 12% cup, you only pay a 12% income tax on that $20,000 portion of your income, and so on.

A real-world example of how tax brackets work

You’re a single person who will earn $120,000 in income in 2022, but let’s say you have $20,000 in deductions, so your taxable income is $100,000.

You start “pouring” in your income at the top.

First, the 10% cup can hold $10,275 of your taxable income.Next, the 12% cup can hold the rest of your income up to $41,775. That’s $31,500 of your income — $41,775 minus the $10,275 in the 10% cup.Then, the 22% cup can hold the rest of your income up to $89,075. That’s $47,300 of your income — $89,075 minus the $10,275 in the 10% cup and $31,500 in the 12% cup.Finally, the 24% cup can hold the rest of your income up to $170,050. That’s $10,925 of your income — $100,000 minus the $10,275 in the 10% cup, $31,500 in the 12% cup, and $47,300 in the 22% cup.

So, here’s what you actually have to pay:

You have to pay 10% of $10,275, or $1,027.50.You also have to pay 12% of $31,500, or $3,780.You also have to pay 22% of $47,300, or $10,406.You also have to pay 24% of $10,925, or $2,622.

Add that up and you owe $17,835.50. You’re paying a roughly 15% overall tax rate on your gross income, even though you’re in the 24% tax bracket. That’s because you’re paying a lot less than 24% on most of your income.

For this individual, 15% is their effective tax rate, and 24% is their marginal tax rate. The effective tax rate is how much a person is actually paying on their full taxable income, whereas the marginal tax rate is what tax bracket they’re in and how much they’d have to pay on any additional income.

[ Read: How Donating to Charity Affects Your Taxes ]

This pattern holds true for almost any income. People actually pay a much smaller percentage of their income than the tax bracket they find themselves in.

What to consider with 2022 tax brackets

Deductions reduce how much you owe

If you have some tax deductions, that means that you’re pouring less money in the fountain to begin with, so you’re actually just pouring less money into the bottom bowl you can reach. 

So, in the example above, if our $100,000 single income earner finds another $5,000 in deductions, that means that they’re going to just have $5,000 less in the 24% bowl. They’ll pay 24% on just $5,925 of their income, or $1,422. Their tax bill goes down by $1,200 because of that additional $5,000 deduction. So, tax deductions really impact your tax bill and can even sometimes bump you down to a lower tax bracket.

You’ll always have some deductions

The IRS always gives you the standard deduction if you don’t have many actual deductions you can verify. In 2022, this means that a single person always gets at least $12,950 as a deduction, and a married couple filing jointly always gets at least $25,900 as a deduction. 

[ Next: How to Get Help With Your Taxes While Social Distancing ]

So, even if you can’t show evidence of anything you can deduct, a single person can still cut their taxable income by $12,950. If you’re single and make $20,000 a year, you get a $12,950 standard deduction, meaning you’re only taxed on $7,050 of your income, all of which falls into that 10% bowl. Your total income tax bill is $705 — 10% of $7,050. This person is almost certainly getting a refund if they have an employer that’s been taking money out of their check for taxes.

There are even a few extra deductions you can still take while also getting the standard deduction. 

Tax credits come off your tax bill at the end

If our $100,000 single person had a $1,000 tax credit, they calculate their taxes as described above, but then their bill goes down from $17,835.50 to $16,835.50.  In other words, tax credits are far better than tax deductions. They’re both good, but credits are great.

[ More: The Simple Guide to Income Tax ]

The easiest way to find all the deductions and credits you’re eligible for is to use the best tax software or hire a trusted tax preparer like H&R Block.

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[This article was originally published on The Simple Dollar in November, 2020. It was updated in November, 2021.]