What is a Tax Bracket?

Tax brackets are like a chore chart…

In a family, kids often do different chores based on their age bracket (e.g., taking out the trash). 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, maybe mowing the lawn or putting away the dishes. By the time they’re almost adults, 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.

Here are the federal tax brackets in the US for 2022 (the taxes that are due spring 2023):

Here are the federal tax brackets in the US for 2023 (the taxes that are due spring 2024):

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 $12,950 for your 2022 taxes and $13,850 for your 2023 taxes. The standard deduction for married couples filing jointly is $25,900 for your 2022 taxes and $27,700 for your 2023 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 2022 and filed as a single individual. After you apply the standard deduction of $12,950, your taxable income is $37,050. Now your income only falls into two tax brackets: 10% and 12%.

The first $10,275 of your income falls into the first federal income tax bracket, which has a tax rate of 10%. So, you pay a total of $1,027.50 in income taxes for this portion of your income. The next $31,500—every dollar from $10,275 to $41,775 — falls into the second tax bracket with a tax rate of 12%. On this you would owe $3,213. (That is, 12% multiplied by $41,775-$10,275.)

When you add it all up, $1,027.50 plus $3,213 equals $4,240.50, so you would owe $4,295 in federal income tax.

In this example, your total federal income tax burden for 2022 is $4,240.50. To find your effective tax rate, divide the total amount you paid in income taxes by your total income of $50,000, which is 8.5%. Thanks to the standard deduction and the progressive tax system, your effective tax rate is lower than the lowest federal tax bracket.

Depending on where you live, you may owe state or local taxes too. As of 2022, Alaska, Florida, Nevada, South Dakota, Texas, Tennessee, Washington State, and Wyoming do not have a personal income tax.

If you live in a different state, you’ll pay state income tax.

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. States that allow local income taxes include Alabama, Arkansas, California, Colorado, Delaware, Indiana, Iowa, Kentucky, Maryland, Michigan, Missouri, New Jersey, New York, Ohio, Oregon, Pennsylvania, and West Virginia.

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 would actually reduce the amount of money they take home in the end. But usually, this 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.

Robinhood does not provide tax advice. Please consult with a tax professional regarding your personal circumstances.