Analyzing Income Tax Brackets: 2021 V/S 2022. What's New?

Undoubtedly, this period of the year is exceptional for taxpayers. Firstly, they'll be filling their due tax return for 2021. Secondly, they'll be preparing for tax management in 2022.

Even though federal income tax rates and tax brackets haven't changed, the future holds differences in some components of taxes. We shall figure out the differences further.

In 2021 and 2022, the tax slabs haven't changed (Current tax slab and effective tax bracket).These slabs are as follows: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

We all know that income brackets are slightly adjusted for inflation every year. Therefore, you might be subjected to a different tax rate for your 2022 income. Hence, the tax rates for both years will be different.

If you are new to filing taxes, you may not be aware that your filing status can impact the tax bracket range. For instance, in 2021, under a 10% tax slab, single taxpayers will pay up to $9,950 as tax. However, in the same year under the same tax slab, the head of households has to pay up to $14,200. A similar difference was available in the 2022 financial year.

Biden's ambitious tax plan had many proposals. While some of these proposals (the American rescue plan) were enacted, others are still pending. One of these proposals is increasing the federal income tax rate from 37% to 39.6%.

The rate of these tax brackets may increase or decrease depending upon the future ambitions of the government. Surprisingly, federal income tax has been as high as 92%. If this proposal is implemented, then from 2022 onwards, your tax filling amount will change. This increase is for the US safety net and climate protection.

Inflation adjustment has made its way to the standard deduction amount too. Almost 90% of taxpayers prefer standard tax deductions over itemized deductions. Therefore, the 2022 Standard deduction amount will be more than the 2021 deduction.

For instance, singles/ married couples filing separately could avail of a maximum deduction of $12,550 in 2021, whereas in 2022 this group can avail a maximum deduction of $12,950. The additional standard deduction for blinds, and/or citizens who are equal to or more than 65 years has also increased. In case of marriage penalty joint filers often end up paying more than what they could pay separately.

A much-needed tip

The tax period creates panic in the United States, so a taxpayer might need more time to file taxes, in case they need more time to sort out their finances.

Here, Form 4868 gives time to correct the situation. It can give a maximum extension of 6 months from is a deadline of April 15. However, this extension is solely for return and not for payments. In case of pending taxes, avoid penalty/ interest by estimating and clearing your due amount.

Wrapping up!

Staying informed of 2021 federal income tax slabs will help file taxes in 2022. Salary, capital gains, interest, and other sources of income together account for the tax slab and not just the salary part. Further, deductions may pull down the taxable income and thus reduce your tax liability.