Tax Brackets and AMT

Vivianna De La Torre
August 8, 2022

In this blog I will be touching on what tax brackets are and a common misconception associated with the tax brackets. In addition, I will touch on the tax brackets for capital gains as well as what the alternative minimum tax is and its purpose.

Tax Brackets Defined

Tax brackets are continuously changing year after year to account for the changes in the cost of living. The purpose of the tax brackets are to determine which percentage the taxpayer will be taxed with depending on their yearly income, and which category they fall under. Whether it be single, married filing jointly, married filing separately, or head of household. However, a common misconception is that when a taxpayer falls into their bracket, let’s say 22%, it is believed that all of the taxpayers’ taxable income must be taxed at 22%. This is not the case. In fact, assuming we are using tax brackets for single filers in 2022, only taxable income that is above $41,775 to $89,075 is taxed at 22%. Anything below $41,775 is taxed at 12%, which is the previous tax bracket.

Tax brackets for 2022 provided by the IRS:

For tax year 2022, the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).

The other rates are:

35%, for incomes over $215,950 ($431,900 for married couples filing jointly);

32% for incomes over $170,050 ($340,100 for married couples filing jointly);

24% for incomes over $89,075 ($178,150 for married couples filing jointly);

22% for incomes over $41,775 ($83,550 for married couples filing jointly);

12% for incomes over $10,275 ($20,550 for married couples filing jointly).

The lowest rate is 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).

Capital Gains

Capital gains are defined as profit from an investment or a sale of property. Similarly to taxable income, long-term capital gains have their own tax brackets as well and use different rates than ordinary income. Unlike taxable income brackets that have seven tax brackets, capital gains only has two. For 2022, taxable income over $41,675 was taxed at 15% and taxable income over $459,750 was taxed at 20%. In addition, there were only three categories instead of four, which include unmarried individuals, married individuals filing jointly, and head of household.

Alternative Minimum Tax (AMT)

The alternative minimum tax was passed in 1960 and served to prevent high-income taxpayers from avoiding the individual income tax. The way it works is that high-income taxpayers must calculate their tax bill twice. Once will be using the ordinary income method and the second time will be using the AMT. The taxpayer will end up paying the higher of the two calculations. To prevent the low and middle class from being subject to the AMT, there is an exemption amount and phases out for high-income taxpayers. The exemption amount for unmarried individuals is $75,900 and for married filing jointly $118,100. However, the exemption phaseout thresholds are $539,900 for single taxpayers and $1,079,800 for married filing jointly.

Resources:

https://www.bankrate.com/glossary/t/tax-bracket/

https://taxfoundation.org/2022-tax-brackets/

https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022

HTH & Accounting Associates help organizations and business owners with accounting and/or financial consulting services. For Help with the accounting cycle or Bookkeeping contact us at accounting@thaddeus.org or call us at 909-599-2111

Thank you for reading.

The author of this blog, Vivianna De La Torre, works at Thaddeus as an Accounting Intern. She is currently a student at the University of La Verne majoring in Accounting. Vivianna aspires to become an Accountant one day and pass the CPA exam.