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As your income rises, you may be surprised to see how your tax filings change. Growth is a theme we often see with our clients at EY TaxChat™.
You’ve worked hard to get here, and your annual earnings show it - so what really happens to your taxes now that you earn more than $100,000 annually?
For the 2021 tax year, there are seven tax brackets with the following marginal tax rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Determining which tax rates apply to you depends on your taxable income and your filing status.
The US tax system is progressive, so as your taxable income increases, so do the tax rates that apply. In addition, your filing status will impact which tax brackets you fall within. For example, if your filing status is Single, with taxable income of $100,000, then part of your income will be taxed up to 24%. Whereas, if your filing status is Married Filing Jointly with combined taxable income of $100,000, then part of your income will be taxed up to 22%.
A common misconception is that the tax rate of the highest tax bracket in which you fall applies to all of your income. Instead, your income is taxed on each dollar within a tax bracket’s range - yes, even the lower ones! In the following table, let’s look at an example of the 2022 progressive tax calculation for a taxpayer with a filing status of Single and taxable income of $100,000:
No matter how high the income is, it always starts from 10%, the lowest tax bracket. In this case, the highest tax bracket is 24%, and only $10,925 of the $100,000 is subject to 24% tax. Therefore, a Single taxpayer with $100,000 of taxable income would have a tax liability of $17,836, or an effective tax rate of 18%.
Also remember, this is just a basic example. Income from capital gains and qualified dividends are generally subject to lower income tax rates.
Be aware — your income level does indeed affect your eligibility of certain tax deductions and tax credits.
The following common tax deductions and tax credits can be limited per income level for 2022:
Credit for Child and Dependent Care Expenses:
Up to $3,000 of qualified care expenses per eligible child or dependent ($6,000 maximum for two or more eligible children or dependents) may be used to calculate the credit. (refer to IRS Pub. 503 for a complete listing of qualified care expenses) Taxpayers may fully qualify for a non-refundable tax credit of up to 35% of qualified care expenses with adjusted gross income (AGI) of $15,000 and less. The percentage then gradually decreases until the taxpayer’s AGI reaches $43,000 or more, at which the potential non-refundable credit will be only up to 20% of the qualified care expense. At this higher level of income, the maximum credit would be $600 for one qualifying child.
Child Tax Credit:
For tax year 2022, the maximum child tax credit allowed is $2,000 per qualifying child under the age of 17. The credit begins to phase out once your gross income exceeds $400k for MFJ filers and $200k for all other filers.
Student loan interest deduction:
You may deduct the lesser of $2,500 or the amount of interest you paid during the year. The deduction begins to phase out once your gross income exceeds $140k and is completely eliminated at $170k for MFJ filers. For Single taxpayers, the deduction begins to phase out once your gross income exceeds $70k and is completely eliminated at $85k.
American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC):
For tax year 2022, the AOTC is up to $2,500 per qualified student for the first four years of higher education, and the LLC is up to $2,000 for other qualified higher education. Both credits begin to phase out once your gross income exceeds $160k and is completely eliminated at $180k for MFJ filer, and for Single filer, the two thresholds are $80k and $90k.
About EY TaxChat™
EY TaxChat is an on-demand mobile service that connects you with a licensed tax professional who will prepare your taxes and file them for you. Click here to learn more and register for EY TaxChat at any time, from anywhere, or by downloading the app from the Apple App Store or GooglePlay Store.
This information is provided solely for educational purposes; it does not take into account any specific individual or entity’s facts and circumstances. It is not intended, and should not be relied upon, as tax, accounting or legal advice. Ernst & Young LLP expressly disclaims any liability in connection with the use of this presentation or its contents by any third party. Neither EY nor any member firm thereof shall bear any responsibility whatsoever for the content, accuracy or security of any third-party websites referenced.
Summary
It’s more important than ever to understand the impact of taxes as your income rises. EY TaxChat™ brings exceptional professional experience so your taxes are thoughtfully prepared with a modernized approach for the convenience you need.
