What Are Tax Brackets, and How Do Federal Income Tax Brackets Work?
In the United States, every working person who earns more than a certain amount of money each year needs to pay income taxes to the federal government. Not everyone pays the same amount, though; the U.S. uses a progressive tax system, which means that, as taxpayers’ income levels increase, so do the amounts they owe in income taxes. These different amounts are based on tax rates, which are various percentages of income that the government collects back in taxes. The points at which these amounts change are the boundaries of tax brackets.
Income taxes have a variety of different rules and regulations, and their details can get complicated. Learning the fundamentals — including what tax brackets are and how they work — equips you with the knowledge you need to better understand our tax system as a whole.
What Are Tax Brackets?
Tax brackets are dollar ranges of income that determine the percentage of your income you pay to the federal government in taxes. Each bracket has a separate percentage amount associated with it, and each portion of your income that falls into the bracket’s dollar range is taxed at the bracket’s percentage. For the 2020 tax year, the tax brackets and their respective rates for single filers were as follows:
- $0 to $9,875 in income, 10% tax rate
- $9,876 to $40,125 in income, 12% tax rate
- $40,126 to $85,525 in income, 22% tax rate
- $85,526 to $163,300 in income, 24% tax rate
- $163,301 to $207,350 in income, 32% tax rate
- $207,351 to $518,400 in income, 35% tax rate
- $518,401 or more in income, 37% tax rate
Currently, there are seven different brackets, and their tax rates range from 10% to 37%. The bracket amounts can change each year, so the list above should serve only as an example. It’s also important to note that the dollar ranges that fall into each bracket differ depending on filing status — single individual, married individual filing jointly, married individual filing separately or head of household.
What does this mean? Say you earn $50,000 a year in income from all sources. For 2020, this would put you in the taxable income bracket that ranges from $40,126 to $85,525. If you’re a single filer, you pay a 22% rate on your earnings between $40,126 and $50,000; 12% on your earnings between $9,876 and $40,125; and 10% on your income between $0 and $9,875. However, because the bracket amounts change based on filing status, if you were married filing jointly your taxes would look somewhat different. The married filing jointly status has a bracket that ranges from $19,751 to $80,250 with a tax rate of 12%. So, you’d instead pay 12% in income tax on your earnings between $19,751 and $50,000, and you’d pay 10% on your earnings between $0 and $19,750 (another married filing jointly-specific bracket).
The separate brackets account for the number of people included in a type of filing status and the amount of financial burden people in each category typically have. The head of household filing status usually applies to single parents who are at least 50% responsible for a dependent, and the upper limit of the lowest tax bracket for a head of household is typically more than that of a single person.
All of the brackets for married taxpayers filing jointly are higher than other brackets because they count the income of two people. Married filing jointly taxpayers can earn more than a single taxpayer while remaining in the lowest tax bracket. However, there usually are only small variances between the tax bracket thresholds for single and married filing separately taxpayers.
What Is a Progressive Tax System?
The federal government uses a progressive tax system. In a progressive system, people who have the ability to pay more in taxes (because they earn more money) are required to pay more in taxes. Rather than taxing at a flat rate on all income, the government has a graduated scale of tax rates based on income tax brackets. People who make less money pay a smaller percentage of income tax. People who make more money pay a larger percentage of income tax.
The system is also progressive in the sense that taxpayers pay progressively. A taxpayer may fall into the highest tax bracket, but their total income isn’t taxed at the percentage for that bracket alone. Rather, the amount of income that falls within each bracket is taxed at the rate corresponding to that bracket, as outlined in the section above.
How Are Brackets and Rates Different?
Although tax brackets and tax rates work together for the common goal of determining how much income tax you owe, there are key differences between the two. A tax bracket is a range, and a tax rate is a set percentage. Tax brackets are based on your tax filing status and total taxable income. Tax rates are based only on where your income falls within a certain tax bracket.
On the federal level, tax rates and tax brackets are a matter of law. The Internal Revenue Service (IRS) is responsible for updating tax brackets and rates and enforcing the existing brackets and rates. These numbers are a matter of law so they can’t be changed on a whim, but they have changed very often throughout history. Since the appearance of tax brackets in 1913, there have been six years in which there were more than 50 tax brackets. In the 1940s, tax rates for the highest brackets rose to 91%
How Brackets and Rates Impact Taxes
Tax brackets and tax rates go hand in hand to determine the taxes that you owe. Each tax bracket, based on your annual income, is associated with a tax rate. Tax brackets are based on taxable income, not total income.
Before you can determine which tax bracket your upper level of income falls into, you’ll need to identify any tax deductions you qualify for that can reduce what counts towards your total income. Deductions are dollar amounts you can subtract from your overall taxable income amount to lower your tax liability for the year. Once you determine your taxable income for the year, you can then figure out which tax brackets apply to you. Because the U.S. follows a progressive tax system, any taxpayer who passes the upper limit of the first tax bracket will pay multiple tax rates on whatever portion of their income falls into each bracket.