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What is bracket creep, what does the IRS do about it, and what does it mean to you?
Bracket Creep happens when workers are paid more, to compensate for inflation, only to find themselves pushed into a higher tax bracket as a result of their increased earnings. On November 10, 2021, the Internal Revenue Service (IRS) announced the tax year 2022 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. (See: Revenue Procedure 2021-45 PDF )
The chart below shows how inflation has driven bracket creep from the 2021 tax rates to the 2022 tax rates just announced.
2 Important Facts to Remember in an Inflationary Economy
In the 1970s, some American workers took the position that it could be “better” to earn less and stay in a lower tax bracket than to earn more but pay higher taxes. Although this thinking has always been flawed, the IRS has gotten better over the years in adjusting bracket creep with increasing effectiveness.
Here are two key facts to keep in mind when thinking about how your income matches up to your tax bracket.
- Brackets are applied incrementally. Example: the single filer taxpayer earning $90,000 in taxable income does not pay federal income tax at a rate of 24 percent on the full $90,000. Instead, the first $10,275 of earnings are taxed at the 10 percent rate. Earnings between $10,275 to $41,775 are taxed at the 12 percent rate, while earnings above $41,775 up to $89,075 are taxed at the 22 percent rate. And only the final $925 of this taxpayer’s $90,000 in earnings is taxed at the full 24 percent rate.
- Inflation is a reality. And higher taxes, per the proposed tax changes, certainly seem as if they will be an issue for many taxpayers. A critical part of ensuring your financial wellbeing, or that of your employees, comes in taking full advantage of all opportunities to save for your comfortable retirement and to maximize pre-tax savings and deferrals. Financial wellness requires understanding the types of opportunities and strategies available and then seeking guidance in selecting the options that are right for you or your employees.
We invite you to contact any of the wealth and retirement professionals at Fulcrum Partners, a OneDigital company.
Talk to any member of the Fulcrum Partner team of executive benefits professionals.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.
Securities offered through Lion Street Financial, LLC (LSF) and Valmark Securities, Inc. (VSI), each a member of FINRA and SIPC. Investment advisory services offered through Lion Street Advisors, LLC (LSA) and Valmark Advisers, Inc. (VAI), each an SEC registered investment advisor. Please refer to your investment advisory agreement and the Form ADV disclosures provided to you for more information. VAI/VSI and LSF/LSA are non-affiliated entities and separate entities from OneDigital and Fulcrum Partners.
Unless otherwise noted, VAI/VSI, LSF/LSA are not affiliated, associated, authorized, endorsed by, or in any way officially connected with any other company, agency or government agency identified or referenced in this document.
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