Tax Rates for 2022
The United States imposes a progressive system of federal income tax with seven rate brackets that range from 10 percent to 37 percent. The highest rate of 37 percent is applicable to individual income in excess of certain income thresholds depending on your filing status.
Because short-term capital gains (those earned on assets held for less than one year) are taxed as ordinary income, taxpayers subject to the 37 percent income tax rate will pay that rate on short-term capital gains.
Long-term capital gains are subject to tax at either 0 percent, 15 percent, or 20 percent depending upon a taxpayer’s filing status and taxable income.
Determining Your Filing Status
One of the first considerations when you file your tax return is designating your filing status. Although this selection may seem straightforward, in some instances, you have choices. The filing statuses are single, married filing jointly (including surviving spouses and qualifying widows), married filing separately, and head of household.
Filing Single
Individuals who were never married or were divorced on December 31 may file a single return. Individuals who were widowed before January 1 and did not remarry before December 31 may file a single return but under certain circumstances may qualify to file as a surviving spouse or qualifying widower.
Filing Jointly or Separately
Married individuals must file as either married filing jointly or married filing separately. Marital status is determined as of the last day of the tax year; if individuals are married on the last day of the year, they are treated as married for the whole year.
Instead of filing a joint return, you and your spouse may file separate returns on which you would each report only your own income and claim only your own deductions and exemptions. If married, you should compute your tax liabilities both jointly and separately to determine which method will result in less tax.
If you file separately, you may not claim certain benefits, including the credit for the elderly and disabled, the child and dependent care credit, and the earned income credit. Your ability to contribute to a Roth IRA may also be limited.
All of these factors should be taken into consideration by married individuals in deciding whether to file jointly or separately.
Filing as Surviving Spouse
If you are a widow or widower, you may file a joint return with your deceased spouse for the year in which he or she died, provided that you do not remarry within that year. If you remarry within that time, you may file jointly with your new spouse if all other requirements are met.
Generally, a surviving spouse with dependent children is entitled to file a return using the tax tables for joint filers for the two years following the year in which his or her spouse died.
Filing as Head of Household
Individuals who qualify to file as “head of household” are entitled to a higher standard deduction and lower tax rates than individuals who file using single status, although the difference in tax rates between single and head of household status will be significantly less for tax years 2018 through 2025 than it was in previous years.
To Qualify as Head of Household:
- You must be unmarried (or treated as unmarried) and not a surviving spouse at the end of the tax year.
- Your home must serve as the principal place of abode for more than half of the year for either an unmarried child, grandchild, or stepchild; a married child, grandchild, or stepchild who qualifies as a dependent; or another relative who qualifies as a dependent.
- You must contribute more than half of the cost of maintaining the household, including property taxes, mortgage interest, rent, utility charges, upkeep charges, property insurance, domestic help, and food. These costs do not include clothing, education, medical and transportation expenses, vacations, or life insurance.
Income Tax Deductions
Personal Exemptions
The Tax Cuts and Jobs Act (TCJA) suspended the deduction for personal exemptions for the 2018 through 2025 tax years. For some taxpayers, this will be offset by the significant increase in the amount of the standard deduction, the increase in the child tax credit from $1,000 to $2,000 per qualifying child, and the provision of a new $500 nonrefundable credit for dependents other than qualifying children.
Standard Deduction
The standard deduction is a specified dollar amount, based on your filing status, that reduces the income on which you are subject to tax. In general, taxpayers can choose whether to claim the standard deduction or itemized deductions (discussed below). However, you are not entitled to the standard deduction if you are a married taxpayer who files separately and whose spouse itemizes deductions or are not a U.S. citizen or resident for the full year.
An additional standard deduction is available to taxpayers who are elderly or blind. The additional deduction amounts are $1,700 for single filers and heads of household and $1,350 for married taxpayers (whether filing jointly or separately) and qualifying widows and widowers. These additional amounts are cumulative. Thus, married taxpayers filing jointly who are both over 65 and blind could claim four additional deduction amounts.
Itemized Deductions
The TCJA made significant changes to the scope of itemized deductions available to individual taxpayers As a result, many taxpayers who previously itemized their deductions may now find it more beneficial to claim the standard deduction.
State and Local Income Tax Deductions
Under the 2017 law, for tax years 2018 through 2025, itemized deductions for state and local income taxes, property taxes, and sales taxes are limited to $10,000 in the aggregate. This cap is not indexed for inflation.
Interest Deductions
Interest deductions fall into one of five categories— investment interest, home mortgage interest, trade or business interest, passive activity interest, or personal interest—depending on the context in which you borrow the funds or the manner in which you use the proceeds. To maximize the tax benefit of your interest deduction, you must understand the type of interest expense for which you are planning. Depending on how you characterize interest, you may be subject to different deduction limitation rules and various restrictions.
Investment Interest
Investment interest, as a rule, is any interest you incur to buy or carry investment property—property that produces portfolio-type income such as dividends, interest, annuities, and royalties not derived in the ordinary course of a trade or business. You cannot deduct more than your net investment income (investment income less investment expense). Investment interest that i not fully deductible in the current year may be carried over to the following year and remains subject to the limitation of net investment income.
Trade or Business Interest
In most instances, you may deduct interest you incur in connection with a trade or business.Passive Activity Interest
A passive activity is any business activity in which you do not materially participate. Most rental activities are also considered passive activities. Deductions for passive losses are limited to passive income.Home Mortgage Interest
The TCJA made significant changes to the deductibility of home mortgage interest that are especially likely to affect you if you purchase a new home during the years 2018 through 2025 and incur a mortgage to finance the purchase.
For the tax years 2018 through 2025, interest on acquisition indebtedness remains deductible but the amount of debt that qualifies as acquisition indebtedness is reduced from $1 million to $750,000. Any debt you may have incurred before December 15, 2017 is “grandfathered” and, thus, not affected by this reduction. Also, any debt you may have incurred before that date but refinanced later continues to be covered by the prior rules provided the amount of the debt does not exceed the amount refinanced.
However, if you are considering moving from your home during the years 2018 through 2025 and financing the purchase with a new mortgage, the reduced deduction for home mortgage interest is likely to affect you.
Interest on home equity loans may also be deductible but the amount of the loan is subject to the thresholds discussed above. Additionally, the proceeds of the home equity loan must be used to buy, build, or substantially improve the home that is securing the loan.
Interest on a home equity loan that was used for personal expenses, such as vacation expenses or to pay off a credit card balance, is not deductible.
Personal Interest
Personal interest is any interest that does not fall into one of the other four categories. This includes interest on credit cards, personal loans, automobile loans, and tax underpayments. You cannot deduct your personal interest expense. Interest on qualified education loans is deductible, subject to certain limitations.
Keeping Track of Loan Proceeds
As a general rule, how and when you spend the proceeds of a loan will determine whether you receive a deduction. When you use the proceeds of a loan for multiple purposes, you must trace the amounts and allocate them accordingly. The burden of proof on tracing loan proceeds is on you—the taxpayer.
Medical Expense Deductions
Generally, you may deduct unreimbursed medical expenses that exceed 7.5 percent of your AGI in 2021.
To the extent you are able, you may want to consider accelerating medical expenses. Bunching your medical expenses into one particular year may allow you to take advantage of the AGI limit
You may also deduct expenses you paid for medical care of a child who receives more than half of his or her support from you. Deductible medical expenses include certain items specifically prescribed for a medical or physical purpose by a doctor.
Miscellaneous Itemized Deductions
The TCJA suspended the deduction for miscellaneous itemized deductions for tax years 2018 through 2025. Previously, miscellaneous itemized deductions included deductions for expenses of unreimbursed employee travel and transportation, meals and entertainment, certain job-related uniforms and tools, dues to professional organizations, subscriptions to professional journals, job hunting costs, and professional tax return preparation.
In addition, the deduction for expenses paid or incurred for the production of income or maintenance of income producing property is suspended. These expenses include certain investment fees; subscriptions to investment publications; safe deposit box rental; and certain legal, accounting, and custodial fees.
Employee Education Expenses
Under prior law, it was possible to deduct education expenses, including tuition, books, supplies, transportation, and parking, provided they maintained or improved your skills in a job you already had or enabled you to satisfy express requirements for keeping an existing job. Away from-home expenses incurred in pursuit of such studies could also be deducted.
Under the TCJA, these expenses are no longer deductible as miscellaneous itemized deductions for the 2018 through 2025 tax years. However, if your employer pays the expenses or reimburses you for expenses that you substantiate under an accountable plan, your employer can exclude this amount from your income reported on Form W-2.
Alternative Minimum Tax
The AMT is a separate and parallel tax system originally introduced to target taxpayers who might otherwise pay little or no regular tax because of the use of certain deductions.
Minimum Tax Credit
If you have an AMT liability because of certain deductions or credits not fully allowed for AMT (nonexclusion preferences), you may be able to use the minimum tax credit to decrease your regular tax liability in a later year. In most cases, this credit reduces the impact of the AMT by effectively refunding some or all of the AMT paid in prior years. Thus, in some cases, AMT planning may be a matter of timing—payment of AMT now and reduction of regular tax in the future.
Estimated Taxes
Generally, you must pay estimated tax in equal installments on a quarterly basis unless you have a sufficient amount of taxes withheld from your compensation. If you underpay any installment, you may be subject to a penalty, even though your total estimated tax payments for the year are adequate. For calendar-year taxpayers, the due dates for making quarterly estimated tax payments are April 15, June 15, September 15, and January 15 of the following year. If the due date for an estimated payment falls on a Saturday, Sunday, or public holiday, the payment is due on the next day that is not a Saturday, Sunday, or public holiday.
The underpayment penalty will not be imposed if you pay at least 90 percent of your tax liability through withholding or timely quarterly estimated tax payments. Tax liability for this purpose includes not only the regular income tax but also any liability for AMT, self-employment tax, household employment tax, the additional 0.9 percent Medicare tax on compensation above $200,000 for single or married-filling-separately filers and above $250,000 for married-filling-jointly filers, and the 3.8 percent tax on an individual’s net investment income—also known as the “net investment income tax”.
This penalty will not be applicable if your tax liability, reduced by withholding and estimated tax payments, is less than $1,000. Additionally, except for certain high income taxpayers (as explained below), you will avoid a penalty if your current-year estimated tax payments or withholding are at least equal to the tax liability shown on your preceding-year return, provided your preceding-year return covered a full tax year. You generally do not have to make estimated tax payments for the current year if you are a U.S. citizen or resident who filed an income tax return for the preceding year but had no tax liability.
Plan appropriately so that you do not significantly overpay your taxes. Overpayments are essentially interest-free loans to the government, and such amounts, although returned, are dollars not working for you in the interim. To avoid overpayments, calculate your estimated payments and withholding exemptions carefully, adjusting them if your circumstances change.
If you are required to make estimated payments, it may be preferable to make the payments instead of increasing the amount of withheld tax since the payments are made later than the withholding. However, increasing your withholding amount may be preferable if you have underpaid your quarterly estimated tax payments, as the withheld amount is assumed to have occurred evenly throughout the year.
