In order to understand how tax brackets work, you must first know what they are and how they differ from tax rates. A tax bracket is essentially a specific range of taxable income at a certain rate. The United States uses a progressive tax system, which means that as your income rises, the rate at which you are taxed will also increase, up to a certain point.
However, every income falls into specific federal tax brackets, and there are seven tax brackets in total. The U.S. federal income tax rates range from 10% to 37%. This range also has separate dollar brackets for single filers, married or joint filers, separated filers, and head of household filers. The low-income proprietors fall into those tax brackets with a low-income tax rate, whereas those who earn higher incomes fall into the tax brackets that will charge a higher income tax rate.
Knowing how tax brackets work is essential for every adult. We need to be aware of how much of our income will go towards taxes so we can be mindful of our budgeting and if there are any tax deductions that are available to us. Below, we take a look at how federal income tax brackets work and some of the specific income tax rates for different incomes.
HOW IS MY INCOME TAXED?
If we try to understand how tax brackets work, we need to look at some numbers. For example, if you're a single filer and have an annual income of less than $11,000, you will be subject to a 10% tax rate. This is the lower tax bracket.
However, if you earn more than $11,000, you will be taxed at 10% for the first bracket, which has a cut off till $11,000, and at 12% for the remaining amount, ranging from $11,001 to $44,725. This latter is the second bracket.
So, there is a clear difference between your marginal tax rate and your effective tax rate. Let's do some calculations to make it easier for you:
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Imagine you have an annual income of $50,000.
In this case, you are taxed 10% for the first bracket ($11,000), which takes your tax total to $1,100.
Then you will be taxed 12% for the amount that ranges between $11,001 and $44,725, which is $33,725. 12% of this amount is $4,047.
Finally, the remaining amount between $44,725 and $50,000 will be taxed 22%. So, 22% of $5,275 is $1,160.50.
Thus, the total tax you pay is $6,307.50.
Now, this total amount is roughly 13% of your total income, which is $50,000. So, in reality, you're technically not paying 22% of the entire income. You're only paying 13% of the $50,000.
The total amount you pay, through each tax bracket, is the effective tax rate. This is only possible because of the tax bracket system. So, your marginal tax rate (the tax you pay on your top bracket) is 22%. However, your tax liability (the effective tax rate) is listed at 13%.
TAX RATES
The above example showed how the tax bracket works for a single filer. However, there are differences in tax rates for couples, separated people, and people who have a dependent, like a child.
Several tax benefits come about in these scenarios. A single, married filing jointly and married filing separately will also have a different range of income that is taxed. Below are the different tax rates for the 2023 tax brackets to varying incomes for different filers:
SINGLE FILERS
$0 to $11,000 - 10% of this income bracket is taxed.
$11,001 to $44,725 - 12% of this income bracket is taxed. ($1,100 along with 12% of the remainder over $11,000)
$44,726 to $95,375 - 22% of this income bracket is taxed. ($5,147 along with 22% of the remainder over $44,725)
$95,376 to $182,100 - 24% of this income bracket is taxed. ($16,290 along with 24% of the remainder over $95,375)
$182,101 to $231,250 - 32% of this income bracket is taxed. ($37,104 along with 32% of the remainder over $182,100)
$231,251 to $578,125 - 35% of this income bracket is taxed. ($52,832 along with 35% of the remainder over $231,250)
$578,126 and over - 37% of this income bracket is taxed. ($174,238.25 along with 37% of the remainder over $578,125)
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MARRIED/JOINT FILERS
$0 to $22,000 - 10% of this income bracket is taxed.
$22,001 to $89,450 - 12% of this income bracket is taxed. ($2,200 along with 12% of the remainder over $22,000)
$89,451 to $190,750 - 22% of this income bracket is taxed. ($10,294 along with 22% of the remainder over $89,450)
$190,751 to $364,200 - 24% of this income bracket is taxed. ($32,580 along with 24% of the remainder over $190,750)
$364,201 to $462,500 - 32% of this income bracket is taxed. ($74,208 along with 32% of the remainder over $364,200)
$462,501 to $693,750 - 35% of this income bracket is taxed. ($105,664 along with 35% of the remainder over $462,500)
$693,751 and over - 37% of this income bracket is taxed. ($186,601.50 along with 37% of the remainder over $693,750)
If you do not fall under these two categories of tax filers, you can go to the several online resources provided by the Internal Revenue Services (IRS) to find out precisely what you have to pay in taxes, special considerations for your tax liability, and what type of tax filer you are. There is also information on potential tax savings available to tax filers of all kinds.
CONCLUSION
It is extremely important to know what federal income tax bracket you're in to anticipate your Tax Burden. As you can see above, there is a significant chunk of money that you can save if you file your taxes as a couple.
Similarly, there are many other savings that you can take advantage of if you know how much tax you have to pay each year and understand the intricacies of your filing status. You may be surprised at how little you might owe in taxes.
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