Tax brackets can seem like a burdensome social responsibility, especially when you get a raise. For people who are unclear on how it works in the United States, extra income could mean over taxation. However, because the United States operate a progressive tax system, tax brackets are not as bad you think.
What is a tax bracket?
A Tax bracket is a range for taxing taxable income according to increment in your earning in a progressive sequence. Essentially, the government taxes you per fractional dollar increment for the group or range of taxable income. In other words, different portions of your income incur taxation differently- The higher you earn, the higher your taxes.
A tax bracket is a range of incomes that are taxed at a specific rate. Tax brackets are part of a progressive tax system, which implies that tax rates steadily increase as an individual’s income increases. Low-income taxpayers pay lower rates of taxation, whereas higher-income taxpayers pay higher rates.
There are seven federal tax bands for tax years 2022 and 2023, with rates ranging from 10% to 37%.
Tax Brackets Explained
The United States has a progressive tax system, which means that taxes are calculated using a marginal tax rate. A marginal tax rate is the amount of tax paid on a dollar of increased income that moves a taxpayer into a higher tax band.
The marginal tax rate grows in lockstep with a taxpayer’s income. To put it another way, taxpayers will pay the lowest tax rate on the first “bracket” or level of taxable income, a higher rate on the following level, and so on.
Every year, the Internal Revenue Service (IRS) publishes any changes to tax brackets and rates. There are seven federal tax brackets for tax years 2022 and 2023. Each has a distinct rate, ranging from 10% to 37%, as well as a varied range of taxable income for each bracket. For single taxpayers, married joint filers (including qualifying widow[er]s), married filing separately filers, and head of household filers, the dollar ranges in each bracket differ.
Before deciding which tax bracket to use, a taxpayer should first calculate their taxable income, which includes earned and investment income less adjustments and deductions.
Tax Rates VS Tax Brackets
The total amount of taxes owed is computed by combining tax brackets and tax rates. rates. However, while they may sound similar, they are in fact very different.
A tax rate is a proportion of income that is taxed, whereas a tax bracket is a range of income that is taxed at a particular rate. These rates, known as the marginal rate, are 10%, 12%, or 22% or higher.
Most taxpayers, with the exception of those who just pay the minimum tax, have income that is taxed progressively. This means that their earnings are taxed at numerous rates in addition to the nominal rate of their tax bracket.
For tax years 2022 and 2023, a $100,000 annual income falls into the 24% tax bracket. The whole $100,000, however, is not taxed at 24%. It is taxed at various rates associated with the various income categories that cover income segments up to $100,000. As a result, a taxpayer eventually pays less than they would if the complete income was taxed at 24%.
As a result, a taxpayer’s tax bracket does not always represent the percentage of their guaranteed income that will be paid in taxes. It is a tax rate.
Types of Tax brackets
According to the IRS, there are currently seven tax brackets: 10, 12, 22, 24, 32, 35, and 37 percent, with progressively varying rates. Also, other factors besides your taxable income influence your tax bracket; your filing status, time of filing, and yearly economic policy.
For example, we consider a single filer for the 2020 tax bracket, which is due in April 2021. Here is what the tax bracket will look like according to the IRS announcement of tax inflation adjustments for the tax year 2021.
Tax Bracket Tax rate for a single filer
Tax Rate Tax Bracket
10% $0 – $9,875
12% $9,875 – $40,125
22% $40,126 – $85,525
24% $85,526 – $163,300
32% $163,301 – $207,350
35% $207,351 – $518,400
37% $518,401 or greater.
Types of filing status for tax brackets
As stated earlier, the IRS recognizes five categories of filing status that influence your tax bracket. Here are five of them and the class of individuals that constitute each filing status.
They include all single (unmarried), legally separated, and divorced people
Married joint filers
They are a married couple that decides to file jointly by combining their incomes and deducting their expenses.
Married separate filers
They are a married couple who decide to file separately to keep one income lower, especially when under an income repayment plan.
Head of Household Filing
This filing system involves a person who files on behalf of a set of unmarried people legally living together and has paid more than half the cost for the year.
Qualifying widow or widower
It involves a married couple who initially filled jointly until the sudden death of a spouse.
How to Determine Your Own Tax Bracket
There are several online sites available to assist you in determining your precise federal income tax bracket. The IRS provides a variety of information, including annual tax tables with extremely detailed tax filing statuses in increments of $50 of taxable income up to $100,000.
Other websites offer tax bracket calculators, which will do the math for you if you know your filing status and taxable income. Because your tax bracket can change from year to year due to inflation adjustments and changes in your income and status, it’s important to check on an annual basis.
How Do Tax brackets work?
The tax bracket is a formula that the IRS employs to calculate how much taxes you owe according to how your income increases. Several people are quick to think that your tax bracket means the total taxable percentage for the particular bracket group they belong to on their taxable income.
For example, if you are single and earn $50,000, you are in the 22% tax bracket. However, you do not pay the complete 22% on your taxable income. Essentially, your tax is calculated progressively from the tiniest percentage stepwise across the tax brackets.
How to figure out your Tax bracket
As an employee, a look at your w-2 form shows how much withholdings you get per paycheck. Similarly, a 1099 form helps with tax filing for the self-employed and independent contractors for non-employment income.
In addition, whether you are an employee or self-employed, if you understand the calculation, you can figure out your tax bracket before filing. That way, you can easily plan your finances without owing the IRS and getting subjected to a tax audit.
Here is a practical/mathematical example to explain the calculation for figuring out tax brackets.
Assuming you are a single filer who earns $50,000, and we use the IRS announcement for tax inflation for the tax year 2021, here is how to calculate your tax bill.
First bracket taxation ($0-$9,875)
A tax rate of 10% gives us 10% X $9,875= $987.5
Second bracket taxation ($9, 876-$40, 125)
A tax rate of 12% gives us $40,125 minus $9,876 = $30,249
Therefore 12% X $30, 249= $3,629.88
Third bracket taxation ($40, 126- $50, 000 income limit)
A tax rate of 22% gives us $50, 000 minus $40, 126= $9, 874
Therefore 22% X $9, 874= $2, 172.28
The total tax bill for your tax bracket calculated progressively is the tax rates per tax bracket. Essentially, your total tax bill will be $987.5 + $3, 629.88+ $2, 172.28= $6, 789.66
Benefits of Tax brackets
While the pros and cons of the progressive tax system remain debatable, proponents of the tax brackets continue to espouse a few benefits of tax brackets. Here are three of them.
- It balances wealth distribution since higher-income earners pay higher taxes.
- It allows low-income earners to maintain a relatively balanced life without owing the IRS.
- The government can generate revenue without overburdening its citizens.
Tax brackets are a tool for the IRS and provide an easy way to classify a person’s earnings. The reason is that the higher your earning, the higher your tax bracket. It means that each raise in your income can move you over to the next tax bracket. However, you only owe the IRS a percentage of the extra earning rather than the entire earning.
What is the 2021 tax brackets?
According to the IRS, the tax bracket for 2021 is in seven percentage groups, depending on your taxable income and filing status. They include 10%, 12%, 22%, 24%, 32%, 35% and 37%. Essentially, your income is taxed progressively across the varying percentages.
How can I lower my taxable income?
You can lower your taxable income by diversifying your expenses meaningfully. Possible ways include contributing to a 401k, donating to charity, filing joint taxes if you are married, leveraging tax credits, and making savings for childcare.
Is filing jointly for taxes better than single?
The joint filing benefits married couples and helps them profit from several tax breaks. As a result, a joint filing keeps most married couples at the lowest percentile of the tax bracket. For example, the tax brackets for 2020 showed married couples occupying 10% on their first $19 750 of taxable income compared to those who file separately.