The 2022 income tax brackets and standard deductions are out! Although the actual income tax brackets have not changed, the taxable income range per tax bracket has adjusted upward slightly to account for inflation. That’s nice of the IRS, but at the end of the day, the government still wants our money!.
Here are four charts I created for the 2022 income tax brackets for singles and for married couples. In these charts, I also include the long-term capital gains tax rates. The short-term capital gains tax rate equals the federal income tax rate.
Single 2022 Income Tax Brackets
As you can see from the chart, the biggest income tax rate jump goes from 24% to 32% when your income is between $170,051 to $215,950. Further, the widest differential between the income tax rate and long-term capital gains tax rate is income between $215,951 to $459,750. The difference is 20% (35% – 15%).
Married, Filing Jointly 2022 Income Tax Brackets
Married, Filing Separately 2022 Income Tax Brackets
Head Of Household 2022 Income Tax Brackets
If successful, the highest marginal income tax rate would increase from 37% to 39.6%. The rate would kick in for single filers with income over $400,000, heads of household over $425,000, married joint filers over $450,000, and married separate filers over $225,000. In other words, the income thresholds would be lowered for the highest marginal income tax rate for all household formations.
2022 Standard Deduction Amounts
The 2022 standard deduction amounts are as follows:
- Single or married filing separately: $12,950
- Married filing jointly: $25,900
- Head of household: $19,400
The additional standard deduction for people who have reached age 65 (or who are legally blind) is $1,400 for each married taxpayer or $1,750 for unmarried taxpayers.
In other words, the standard deduction amounts reduce your taxable income by the amount per filing status. You can also make up to the 2022 standard deduction amounts and pay no income taxes. This is ideal for students and other low-wage workers who want to contribute to a Roth IRA.
For all parents out there, please encourage your children to earn money, and contribute the maximum $6,000 into a Roth IRA. You’re supposed to contribute after-tax money into Roth IRA. It then compounds tax-free and gets to be withdrawn tax-free. However, for those children and adults earning under the standard deduction amount, they get to contribute tax-free as well!
If you have a small business, opening up a custodial Roth IRA for your child is a no-brainer. In 10 years, your children are guaranteed to thank you or your money back.
2022 Capital Gains and Qualified Dividends Tax Rates
For 2022, long-term capital gains and qualified dividends face the following tax rates:
Single Or Married Filing Separately Long-Term Capital Gains Tax Rate
0% tax rate up to $41,675
15% tax rate up to $459,750
20% tax rate up to $517,200
Married Filing Jointly Long-Term Capital Gains Tax Rate
0% tax rate up to $83,350
15% tax rate up to $517,200
20% tax rate on any income beyond $517,200
You will see these capital gains and qualified dividends tax rates conveniently included in the charts above in the most right column.
2022 Alternative Minimum Tax (AMT)
The 2022 AMT exemption amount is increased to:
- $75,900 for single people and people filing as head of household,
- $118,100 for married people filing jointly, and
- $59,050 for married people filing separately.
The AMT is what nullifies many of the tax benefits given to six-figure and seven-figure income-earners.
2022 Annual Gift Tax Exclusion
For 2022 the annual exclusion for gifts to individuals has increased from $15,000 to $16,000. You can now give $16,000 per person in 2022 tax-free. Each $16,000 gift basically reduces your estate value by $16,000.
If you have an estate valued at greater than the estate tax threshold, it behooves you to give more money away. Otherwise, any money above the estate tax threshold will be taxed at 40%.
The 2022 estate tax threshold per person is now $12,060,000, up from $11,700,000 per person. But again, the estate tax threshold could come down under the Biden administration. President Biden has proposed cutting the estate tax threshold in half.
Another benefit from increasing the annual gift tax exclusion is that you can now superfund a 529 plan with $80,000 in 2022, up from $75,000 per person. A married couple can superfund a beneficiary’s 529 plan in one lump sum by $160,000. But remember, your IRS Form 709 must reflect your option to take the five-year election.
2022 Ideal Income Based On 2022 Income Tax Rates
Now that you know the 2022 income tax brackets, long-term capital gains tax rates, standard deduction amounts, and AMT thresholds, we can now calculate the ideal income for maximum happiness while paying a reasonable amount of tax.
Yes, it’s true that most working Americans don’t pay federal income taxes. 60.6% of Americans didn’t pay income taxes in 2020 and an estimated 57% of working Americans still won’t pay income taxes in 2021. But someone has to pay income taxes to help support this great nation, so that might as well be us.
In terms of the ideal income based on 2022 income tax rates, I say they are:
- $170,050 MAGI for singles
- $340,100 MAGI for married couples
The above income levels face a marginal income tax rate of 24%. Any dollar over gets taxed at a more egregious 32%, an 8 percentage point jump. Why there’s such a large tax rate increase compared to only a 2 percentage point increase from 22% to 24%, I have no idea.
But if you go through a detailed budget, as I have done with a $300,000 household income, you’ll see that earning $170,050 for singles and $340,100 for married couples provides an ideal balance. The income is high enough to save for retirement, own a house, vacation, and raise children. But the income is also low enough that you’re still paying a reasonable income tax rate. The effective tax rate is actually much lower.
Another reason why I’m aiming to consistently generate $300,000 in passive investment income is that the qualified dividends and capital gains are taxed at a reasonable 15% rate. There is obviously a good argument to be made for why investment income and gains should be not be taxed at a higher rate, since we already paid taxes on the invested capital.
Upon closer review of the long-term capital gains tax rates, the ideal passive income amount is up to $517,200. However, getting to that level of passive investment income is just not feasible for most of us.
The Second Ideal Income Amounts Based On 2022 Income Tax Brackets
If you can’t make $170,050 as a single person or $340,100 as a married couple, there’s a second ideal income amount for ultimate happiness and paying reasonable taxes. They are:
- $41,775 MAGI for singles
- $83,551 MAGI for married couples
At these income levels, you are only paying a marginal income tax rate of 12%. Every dollar more than these levels faces a 22% marginal income tax rate up to $89,075 for singles and up to $178,150 for married couples filing jointly. A 10 percentage point jump is pretty steep.
Given some researchers in 2010 reported more money above $75,000 doesn’t buy happiness, married couples may have found their sweet spot at $83,551. If you use a 2% inflation rate since 2010, $75,000 equals $93,253. Therefore, inflation-adjusted, the second ideal income for singles is closer to $48,000 a year, or $4,000 a month.
The only problem with earning less income is that you have less of an absolute dollar amount to save and invest. Therefore, if you plan to earn the second ideal income amount, you had better enjoy your job or already be near or in retirement. At these income levels, it will be very hard to retire early and do something else.
MAGI stands for Modified Adjusted Gross Income. It takes into account all the deductions and credits.
What’s Your Ideal Income Based On Future Income Tax Rates?
I’ve argued the best time to retire may be when tax rates are rising and the social safety net is growing. I left work in 2012 mainly because I was burned out. But the possibility of also facing a 39.6% marginal income tax rate just didn’t sound appealing. I didn’t love the money that much. If I had, I would have kept grinding away.
Today, I’m mainly focused on doing work that I like. The income that comes from it is of secondary consideration. However, I’m still careful about trying to accurately forecast my future investment income because it plays a big part in the overall tax rate I will pay.
Paying a total effective tax rate (federal, state, FICA) up to 25% is ideal in my opinion. At 25%, you’re contributing to the greater good while also keeping most of your hard-earned money. A good life can be lived with an income high enough to pay a 25% effective tax rate.
Paying a total effective tax rate over 30% doesn’t seem worth it at this stage in my life. Therefore, if I’m fortunate enough to pay more than a 25% effective tax rate, I will throttle my work in order to enjoy life more. The only problem is, I almost always enjoy what I do. So any overage should be donated.
Let me know what your ideal income is and why!
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2022 Income Tax Brackets And The New Ideal Income For Max Happiness is written by Financial Samurai for www.financialsamurai.com