What Does It Mean to Be In a Zero Tax Bracket?

What Does It Mean to Be In a Zero Tax Bracket?

Posted by Mckenna Duncan on Nov 9, 2022

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When you look at the tax brackets, they all have a rate greater than zero. You'll be taxed no matter your income, according to the tax brackets. But there is such a thing as the zero tax bracket. It just isn't listed. You have to do some calculations before you can determine if you're in it or not. Let's dive into what it means to be in a zero tax bracket.

Calculating Taxable Income

Before we figure out the zero tax bracket, let's first go over an income tax calculation to determine taxes owed. We'll use a single filter making $75,000 per year. For reference, the 2022 tax brackets are listed below.

Rate

Single Filers

For Married Filing Jointly

For Heads of Households

10%

$0 to $10,275

$0 to $20,550

$0 to $14,650

12%

$10,275 to $41,775

$20,550 to $83,550

$14,650 to $55,900

22%

$41,775 to $89,075

$83,550 to $178,150

$55,900 to $89,050

24%

$89,075 to $170,050

$178,150 to $340,100

$89,050 to $170,050

32%

$170,050 to $215,950

$340,100 to $431,900

$170,050 to $215,950

35%

$215,950 to $539,900

$431,900 to $647,850

$215,950 to $539,900

37%

$539,900 or more

$647,850 or more

$539,900 or more

The taxable income calculation is:

Gross income

- Adjusted gross income (AGI) (alimony, moving expenses for a job, student loan interest)

- Standard or itemized deduction

= Taxable income

For the above filer, $75,000 is their gross income. This person has $5,000 in deductions that apply towards their AGI, making their AGI $70,000. Going from $75,000 to $70,000 keeps them in the 22% bracket. However, we aren’t finished yet.

Next is to subtract the standard deduction or itemized deductions. The filer’s itemized deductions are $6,000. The 2022 standard deduction for a single filer is $12,950. The standard deduction will be used since it is more than the itemized deductions. This brings the filer’s taxable income to $57,050 (70,000 - 12,950).

The filer remains in the 22% tax bracket and will owe taxes. Obviously, this person is not in a zero tax bracket. However, there are many cases where someone can find themselves in the zero tax bracket.

The standard deduction is even larger for those who are 65 or older. A single filter will have a standard deduction of $14,700, while someone who is blind and 65 or older will have $16,450. The respective amounts for married couples filing jointly are $27,300 and $28,700.

Arriving At The Zero Tax Bracket

We can start with a simple example of how someone ends up in the zero tax bracket. A single filter earns $12,000 per year. They take the standard deduction of $12,950. This leaves them with -$950 in taxable income. The filer doesn't owe any taxes and is considered in the zero tax bracket. This person might even get a tax refund.

However, even for the above $75,000 filer, they can take the standard deduction, which shields $12,950 of income from taxes. This is what people refer to as the zero tax bracket. 

Investment income can also play a role in determining if someone will be in the zero tax bracket. In 2022, single filers with long-term capital gains up to $41,675 won't owe taxes on those gains. Married couples filing jointly get twice that amount ($83,350). How does the zero tax bracket work with long-term capital gains?

Let’s say a single filer has $30,000 in long-term capital gains. They will owe zero taxes on this amount since they are within the 0% tax bracket for long-term capital gains. Two main categories qualify for the long-term capital gains rate. They are investments held for over one year and qualified dividends.

Note that all of the above applies to Federal taxes. If you live in a state with state income taxes, you may still owe certain taxes.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

Hypothetical examples shown are for illustrative purposes only.

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