What is a Tax Bracket?

Tax brackets are like a chore chart…

In a family, kids do different chores based on their age bracket. Every kid has to do the chores in the bottom bracket. As the kids get older and move into a higher age bracket, they take on extra tasks. So by the time they’re old enough to move out of the house, they have to do every chore.

The income tax system in the United States is progressive. As income increases, so does the amount of income tax you’re supposed to pay, so you move into a tax bracket with a higher rate. But due to marginal tax rates, you don’t pay the same rate on all of your income (unless all of your income falls within the lowest income tax bracket). Instead, you pay taxes on each dollar you earn at the rate of the tax bracket in which it falls.

There are seven tax brackets, and here are the rates:

1. 10%
2. 12%
3. 22%
4. 24%
5. 32%
6. 35%
7. 37%

For someone filing taxes as a single individual on the money they earned in 2019 (meaning the taxes that are due in April 2020), the lowest tax bracket applies only to income up to $9,700, while the highest tax bracket applies only to income that is higher than $510,300. In 2017, a new law made several changes to the income tax system, including reducing the tax rate of five of the seven tax brackets and nearly doubling the standard deduction.

Here are the tax brackets and marginal tax rates for 2019 income, (which apply to the income taxes you’ll file by April 2020):

The income thresholds for the brackets will change slightly as they apply to 2020 income (meaning the income taxes you’ll file by April 2021). Here’s what those will look like:

The lower your taxable income, the less you have to pay in income taxes. Our tax system in the United States provides opportunities to move into a lower tax bracket and pay less in income taxes, without reducing your gross income. You can do this through tax deductions, which you subtract from your taxable income when you file your taxes..

There are two options for income tax deductions: the standard deduction and itemized deductions. The standard deduction is a fixed amount that anyone can deduct. For single people, the standard deduction is $12,200 for your 2019 taxes and $12,400 for your 2020 taxes. The standard deduction for married couples is $24,400 for your 2019 taxes and $24,800 for your 2020 taxes.

The other option is to itemize deductions. There are hundreds of deductions available, and you can use any that apply to you. The more you deduct, the less you’ll pay in income taxes. Some popular deductions allow you to lower your taxable income based on interest payments you make on student loans, contributions you make to charities, and the money you contribute to your Individual Retirement Account (IRA) or 401(k) plan.

For most people, the amount they would be able to itemize ends up being less than the standard deduction. For them, it makes sense just to use the standard deduction. But if you qualify for enough itemized deductions that they add up to more than the standard deduction, you can go that route instead. Just keep in mind, you can only do one or the other.

We know that tax brackets represent the marginal tax rate that applies to each chunk of your income, and that your income will typically fall into multiple different brackets. Your effective tax rate is the average tax percentage that you pay on all of your income.

For example, let’s say you made $50,000 in 2019 and filed as a single individual. Your income falls into three different tax brackets: 10%, 12%, and 22%. After you apply the standard deduction of $12,200, your taxable income is $37,800. Now your income only falls into two tax brackets: 10% and 12%.

The first $9,700 of your income falls into the first tax bracket, which has a tax rate of 10%. You pay a total of $970 in income taxes for this portion of your income. The next $28,100 falls into the second tax bracket with a tax rate of 12%. You pay a total of $3,372 in income tax for this portion of your income.

In this example, your total federal income tax burden for 2019 is $4,342. To find your effective tax rate, divide the total amount you paid in income taxes by your total income of $50,000, which is 8.7%. Thanks to the standard deduction, your final tax rate is lower than the lowest federal tax bracket.

Depending on where you live, you might have state and local tax brackets to pay attention to in addition to the federal brackets. Seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming — do not have a personal income tax. If you don’t live in one of those states, you’ll pay state income tax. State income tax rates range from 2.9% in North Dakota to 13.3% in California.

You may also have to pay local taxes in 16 states that allow cities and counties to levy their own income taxes. Depending on where you live, you could potentially end up paying three different income tax bills — federal, state, and local. The states that allow local income taxes are Alabama, Arkansas, California, Colorado, Delaware, Indiana, Iowa, Kentucky, Maryland, Michigan, Missouri, New Jersey, New York, Ohio, Oregon, and Pennsylvania.

The income tax system in the United States can be a bit confusing, which leads to a lot of misinformation. One of the most common misconceptions about income tax brackets is that increasing your income could lower your net income (meaning the amount you get to take home after taxes).

Where does this confusion come from? Many people think that they pay one tax rate on their entire income, so they fear that increasing their income and moving into a higher tax bracket will actually reduce the amount of money they take home in the end. But this usually is not the case. If an increase in your income pushes you into the next tax bracket, only the portion of income that falls into that tax bracket will have a higher rate. The rest of your income will continue to fall into the same tax brackets as before.

In the United States, we have a progressive income tax system, which means that income is taxed at a progressively higher rate as it goes up. The highest tax bracket of 37% applies to income of at least $510,301 for a single person. But someone earning more than that doesn’t have to pay 37% on all of their income — that rate only applies to the part of their income that exceeds $510,300.