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. Flat Tax

    A system that applies the same tax rate to every taxpayer regardless ...
  3. Vertical Equity

    A method of collecting income tax in which the taxes paid increase ...
  4. Tax Schedule

    A rate sheet used by individual taxpayers to determine their ...
  5. Tax Liability

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

    A United States government agency that is responsible for the ...
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. Taxes

    How do I find out what my tax bracket is?

    Learn the information you need to determine what your tax bracket is.
  3. Taxes

    What's the difference between a tax rate and a tax bracket?

    These two terms are often incorrectly used interchangeably. Find out the difference between your tax rate and your tax bracket.
  4. Taxes

    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 pay, or net pay, will decrease. This assumption is incorrect. Because ...
  5. Retirement

    How IRA Contributions Affect Your Taxes

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

    What are the best ways to lower my taxable income?

    Paying taxes is an unavoidable obligation each year, but individuals and business owners can take advantage of various strategies for tax savings.
  7. Fundamental Analysis

    Are taxes calculated in operating cash flow?

    Learn how taxes are involved with the calculations for operating cash flow, and find out about the importance of operational cash flow.
  8. Economics

    EU Probes Tax Laws To Catch Corporate Cheaters

    Recently, the EU has launched an investigation into tax deals between Amazon and the country of Luxembourg.
  9. Taxes

    How To Deduct All Of Your Charitable Donations?

    Donations made to charitable organizations can reduce your taxable income, thus your overall tax bill. But not all donations qualify to be deductable.
  10. Professionals

    How are an employee's fringe benefits taxed?

    Discover how receiving fringe benefits can increase total compensation for employees and how it is important to understand how these benefits are taxed.

You May Also Like

Hot Definitions
  1. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  2. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  3. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  4. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  5. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  6. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
Trading Center