Tax Bracket

AAA

DEFINITION of 'Tax Bracket'

The rate at which an individual is taxed. Tax brackets are set based on income levels; individuals with lower income levels are taxed at a lower rate than individuals with higher income levels. Tax brackets serve as cutoff points for given income tax rates; therefore, if an individual's annual taxable income exceeds the cutoff point, that person is taxed according to the next tax bracket.

INVESTOPEDIA EXPLAINS 'Tax Bracket'

Most countries tax individual incomes using a system of tax brackets. This structure implements what is referred to as a progressive tax system, in which taxation progressively increases as an individual's income grows. This contrasts with a flat tax structure, in which all individuals are taxed at the same rate, regardless of their income levels.

Proponents of the use of tax brackets and a progressive tax system contend that individuals with high incomes are more able to pay income taxes while maintaining a high standard of living, while low-income individuals struggle to meet their basic needs, and should be subject to less taxation.

Furthermore, the use of tax brackets has an automatic stabilizing effect on an individuals' after-tax income, as a decrease in salary is counteracted by a decrease in tax rate, leaving the individual with a less substantial decrease in after-tax income.

To learn more about tax brackets, read What's the difference between a tax rate and a tax bracket?

RELATED TERMS
  1. Uncle Sam

    A nickname dating back to 1812 used to refer to the U.S. government. ...
  2. Tax Schedule

    A rate sheet used by individual taxpayers to determine their ...
  3. Flat Tax

    A system that applies the same tax rate to every taxpayer regardless ...
  4. Tax Liability

    The total amount of tax that an entity is legally obligated to ...
  5. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
  6. Tax Table

    A table or chart displaying the amount of tax due based on income ...
RELATED FAQS
  1. Which states are the most expensive for high-income earners?

    The most expensive states for high-income earners are California, Hawaii and New York. The tax rates assessed by these states ... Read Full Answer >>
  2. How can I find out which income tax bracket I am in?

    U.S. federal tax brackets are based on filing status (single, married filing jointly, married filing separately or head of ... Read Full Answer >>
  3. What is the difference between income tax and capital gains tax?

    The conceptual difference between income tax and capital gains tax is that income tax is the tax paid on income earned from ... Read Full Answer >>
  4. Are progressive taxes ever more unfair that flat taxes?

    Progressive taxes assign a different tax rate to different taxpayers. Affluent taxpayers pay the highest income tax rates ... Read Full Answer >>
  5. Can you calculate the marginal tax rate in Excel?

    Marginal tax rates are higher for higher-income individuals. Accurate information about current tax brackets is needed to ... Read Full Answer >>
  6. How do I find out what my tax bracket is?

    Understanding which tax bracket to use when preparing one’s taxes requires knowing how much was earned during the year, as ... Read Full Answer >>
  7. What's the difference between a tax rate and a tax bracket?

    Tax brackets refer to the table created when matching filing statuses with their corresponding tax rates. There are three ... Read Full Answer >>
  8. Can moving to a higher tax bracket cause me to have a lower net income?

    Many people think that when their income increases by just enough to push them into a higher tax bracket, their overall take-home ... Read Full Answer >>
Related Articles
  1. Retirement

    Tax Tips For The Individual Investor

    We give you seven guidelines to help you keep more of your money in your pocket.
  2. Retirement

    How IRA Contributions Affect Your Taxes

    Learn how to work with the tax man to avoid getting gouged when you convert your plans.
  3. Taxes

    What is an Ad Valorem Tax?

    An ad valorem tax is a levy placed on real or personal property based on the assessed value of that property.
  4. Retirement

    Does it Make Sense to Have an MLP in an IRA?

    Here's why MLPs should — and shouldn't — be considered for an IRA.
  5. Entrepreneurship

    MLPs: How They Are Taxed

    The advantages of MLPs outweigh the disadvantages, especially if you play your cards right.
  6. Mutual Funds & ETFs

    Pros and Cons of Master Limited Partnerships

    Want steady income? Consider looking into MLPs.
  7. Taxes

    IRS Refund Lost? Here's What to Do

    Don't panic. There are a number of reasons your refund might be delayed – and solutions for each.
  8. Taxes

    Do You Need Umbrella Insurance For Household Help?

    Homeowners insurance may not be enough – say, if your nanny sues for damages after an accident. That's where umbrella coverage comes in.
  9. Taxes

    The Risks of Investing in Art and Collectibles

    Investing in art and collectibles has the potential to lead to a big payday, but it's often a difficult road.
  10. Taxes

    The Advantages of Investing in Art & Collectibles

    Investing in collectibles can be profitable and fun, and can offer tax benefits for some.

You May Also Like

Hot Definitions
  1. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  2. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  3. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  4. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  5. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!