Tax Bracket

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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?

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RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
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