Tax Bracket

What is a 'Tax Bracket'

A tax bracket is 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.

BREAKING DOWN '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?

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RELATED FAQS
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    Learn about U.S. tax brackets and how the U.S. Internal Revenue Service (IRS) makes annual inflation-based adjustments for ... Read Answer >>
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    Find out how to determine your federal income tax bracket and calculate how much you will owe in federal taxes with online ... Read Answer >>
  3. Can moving to a higher tax bracket cause me to have a lower net income?

    Many people think that when their income increases by enough to push them into a higher tax bracket, their overall take-home ... Read Answer >>
  4. How do I find out what my tax bracket is?

    Learn the information you need to determine what your tax bracket is. Read Answer >>
  5. What is the income breakdown for the effective tax rate?

    Read about the effective tax rate, how the marginal income tax brackets affect it and how the denominator in its formula ... Read Answer >>
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    These two terms are often incorrectly used interchangeably. Find out the difference between your tax rate and your tax bracket. ... Read Answer >>
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