What is a 'Tax Bracket'

A tax bracket refers to a range of incomes subject to a certain income tax rate. Tax brackets result in a progressive tax system, in which taxation progressively increases as an individual's income grows: Low incomes fall into tax brackets with relatively low income tax rates, while higher earnings fall into brackets with higher rates.

BREAKING DOWN 'Tax Bracket'

In the U.S., the Internal Revenue Service (IRS) uses a progressive tax system, meaning taxpayers will pay the lowest rate of tax on the first level of taxable income in their bracket, a higher rate on the next level and so on. Currently there are seven federal tax brackets, each assigned a different rate, ranging from 10% to 39.6%, with the dollar ranges in each varying for single filers, married joint filers (and qualifying widow(ers), married filing separately filers and head of household filers, resulting in 28 effective tax brackets. The brackets are adjusted each year for inflation, using the Consumer Price Index.

Beginning in 2018, the federal tax brackets will be updated. There will still be seven brackets, but the new tax rates will range from 10% to 37%. With two exceptions – the lowest tax bracket and the second-highest – individual tax rates will decrease across the board. The income ranges covered by certain brackets will also shift, potentially meaning many Americans will pay lower taxes in 2018 and some will pay more. 

When determining which tax bracket to use, a taxpayer should first calculate his or her taxable income (earned and investment income minus adjustments, deductions and personal exemptions). Note that starting in 2018 through 2025, there will be no personal exemptions.

How Do Tax Brackets Work?

Let's take an example, based on the rates for tax year 2017. Single filers who have less than $9,325 taxable income incomes are subjected to a 10% income tax rate (the minimum bracket). Single filers who earn more than this amount have their first $9,325 in earnings taxed at 10%, but their earnings past that cutoff point and up to $37,950 are subjected to a 15% rate, the next bracket. Earnings between $37,950 and $91,900 are taxed at 25%, the third bracket. And so on.

 Single Taxable Income Tax Brackets and Rates, 2017

Rate Taxable Income Bracket Tax Owed

10%

$0 to $9,325 10% of Taxable Income

15%

$9,325 to $37,950 $932.50 plus 15% of the excess over $9,325

25%

$37,950 to $91,900 $5,226.25 plus 25% of the excess over $37,950

28%

$91,900 to $191,650 $18,713.75 plus 28% of the excess over $91,900

33%

$191,650 to $416,700 $46,643.75 plus 33% of the excess over $191,650

35%

$416,700 to $418,400 $120,910.25 plus 35% of the excess over $416,700

39.60%

$418,400+ $121,505.25 plus 39.6% of the excess over $418,400

 

Married Filing Jointly Taxable Income Tax Brackets and Rates, 2017

Rate Taxable Income Bracket Tax Owed

10%

$0 to $18,650 10% of taxable income

15%

$18,650 to $75,900 $1,865 plus 15% of the excess over $18,650

25%

$75,900 to $153,100 $10,452.50 plus 25% of the excess over $75,900

28%

$153,100 to $233,350 $29,752.50 plus 28% of the excess over $153,100

33%

$233,350 to $416,700 $52,222.50 plus 33% of the excess over $233,350

35%

$416,700 to $470,700 $112,728 plus 35% of the excess over $416,700

39.60%

$470,700+ $131,628 plus 39.6% of the excess over $470,700

Source: The Tax Foundation

Since the tax brackets apply only to the portion of the income that reaches their respective thresholds, most taxpayers must look at several brackets when calculating the amount they must pay.

Here's how the numbers will look in 2018.

 Single Taxable Income Tax Brackets and Rates, 2018

Rate Taxable Income Bracket Tax Owed

10%

$0 to $9,525 10% of Taxable Income

12%

$9,526-$38,700 $952.50 plus 12% of the excess over $9,525

22%

$38,701-$82,500 $4453.50 plus 22% of the excess over $38,700

24%

$82,501-$157,500 $14,089.50 plus 24% of the excess over $82,500

32%

$157,501-$200,000 $32,089.50 plus 32% of the excess over $157,500

35%

$200,001-$500,000 $45,689.50 plus 35% of the excess over $200,000

37%

$500,001+

$150,689.50 plus 37% of the excess over $500,000

 

Married Filing Jointly Taxable Income Tax Brackets and Rates, 2018

Rate Taxable Income Bracket Tax Owed

10%

$0 to $19,050 10% of taxable income

12%

$19,051-$77,400 1,905 plus 12% of the excess over $19,050

22%

$77,401-$165,000 $8,907 plus 22% of the excess over $77,400

24%

$165,001-$315,000

$28,179 plus 24% of the excess over $165,000

32%

$315,001-$400,000 $64,179 plus 32% of the excess over $315,000

35%

$400,001-$600,000 $91,379 plus 35% of the excess over $400,000

37%

$600,001+ $161,379 plus 37% of the excess over $600,000

Source: The Tax Foundation

What Is the Difference Between Tax Rates and Tax Brackets?

People often refer to their tax brackets and their tax rates as the same thing, but they're not. A tax rate is the percentage at which income is taxed; each tax bracket has a different tax rate (10%, 15%, 25%, etc.), referred to as the marginal rate. But most taxpayers – all except those who fall squarely into the minimum bracket – have income that is taxed progressively, so they're actually subject to several different rates, beyond the nominal one of their tax bracket. Your tax bracket does not necessarily reflect how much you will pay in total taxes.

An individual's actual, effective tax rate can be determined by looking at the total amount of tax paid as a ratio of his income.

For example, consider the following tax responsibility for a single filer with a taxable income of $50,000 in 2018:

The first $9,525 is taxed at 10%: $9,525 x 0.10 = $952.50

Then $9,526 to $38,700, or $29,174, is taxed at 12%: $29,174 x 0.12 = $3,500.08

Finally, the top $11,300 is taxed at 22%: $11,300 x 0.22 = $2486.00

Add the taxes owed in each of the brackets and you get $925.50 + $3500.08+ $2,486= $6,938.58.

So, this individual's effective tax rate is approximately 14% of his income.

Pros and Cons of Tax Brackets

Tax brackets, and the progressive tax system they create, contrast with a flat tax structure, in which all individuals are taxed at the same rate, regardless of their income levels.

Proponents of tax brackets and progressive tax systems contend that individuals with high incomes are more able to pay income taxes while maintaining a relatively high standard of living, while low-income individuals – who struggle to meet their basic needs – should be subject to less taxation. They stress that it is only fair that wealthy taxpayers pay more in taxes than the poor and middle class, offsetting the inequality of income distribution. That makes the progressive taxation system "progressive" in both senses of the word: It rises in stages and it's designed with help for lower-income taxpayers in mind.

Supporters also maintain that this system can generate higher revenues for governments and still be fair, by letting taxpayers lower their tax bill through adjustments such as tax deductions and/or tax credits for outlays such as charitable contributions. The higher income that taxpayers realize can then be funneled back into the economy, in theory. Furthermore, the use of tax brackets has an automatic stabilizing effect on an individual's after-tax income, as a decrease in funds is counteracted by a decrease in the tax rate, leaving the individual with a less substantial decrease.

Opponents of tax brackets and progressive tax schedules argue that everyone, regardless of income or economic status, is equal under the law and there should be no discrimination between rich and poor. They also point out that progressive taxation can lead to a substantial discrepancy between the amount of tax wealthy people pay and the amount of government representation they receive. They still only get one vote per person regardless of the personal or even national percentage of tax that they pay.

Opponents also claim that higher taxation at higher income levels can – and does – lead to the wealthy spending money to exploit tax law loopholes and find creative ways to shelter earnings and assets – often with the result that they actually end up paying less tax than the less well-off, depriving the government of revenue. (American companies that relocate their headquarters abroad, for example, frequently do so to avoid U.S. corporate taxes.) They also assert that the progressive system has historically led to reduced personal savings rates among taxpayers. After spiking to 11% in December 2012, the personal savings rate has been on a steady decline, dropping to 2.9% in November 2017, according to the Federal Reserve Bank of St. Louis

History of Federal Tax Brackets

Tax brackets have existed in the U.S. tax code since the inception of the very first income tax, when the Union government passed the Revenue Act of 1861 to help fund its war against the Confederacy. A second revenue act in 1862 established the first two tax brackets: 3% for annual incomes from $600 to $10,000 and 5% on incomes above $10,000 (those were the days!).

The original four filing statuses were Single, Married Filing Jointly, Married Filing Separately and Head of Household, though rates were the same regardless of tax status. (For more information on the history of taxation in America, see The History of Taxes in the U.S. and A Concise History of Changes in the U.S. Tax Law.)

In 1872, Congress rescinded the income tax. It didn't reappear until the Sixteenth Amendment to the Constitution; ratified in 1913, this amendment established Congress' right to levy a federal income tax. That same year Congress enacted a 1% income tax for individuals earning more than $3,000 a year and couples earning more than $4,000, with a graduated surtax of 1% to 7% on incomes from $20,000 and up.

Over the years, the number of tax brackets has fluctuated. When the federal income tax began in 1913, there were seven tax brackets. In 1918, the number mushroomed to 78 brackets, ranging from 6% to 77%. In 1944, the top rate hit 94%, but was brought back down to 70% by President Kennedy. President Reagan initially brought the top rate down to 50%.

Then, in the Tax Reform Act of 1986, brackets were simplified and the rates reduced so that in 1988 there were only two brackets: 15% and 28%. This system lasted only until 1991, when a third bracket of 31% was added. 

Since then, additional brackets have been implemented, so that now we have come full circle and are back to seven brackets, a structure that was kept by the 2017 tax legislation.

From a broader economic perspective, a Tax Foundation analysis suggests that the new tax bill will increase the country’s long-run gross domestic product (GDP) by 1.7%. Economic growth would result in 1.5% higher wages and create an additional 339,000 full-time jobs. On a macro level, average taxpayers would see a 1.1% increase in their after-tax income over the next decade. The new tax law may be particularly beneficial for families with children, due to a doubling of the child tax credit and the provision that $1,400 of the $2,000 credit be refundable. 

State Tax Brackets

Some states have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee only tax dividends and interest income.

Eight states have a flat rate structure, with a single rate applying to a resident’s income: Colorado, Illinois, Indiana, Massachusetts, Michigan, North Carolina, Pennsylvania and Utah.

In other states, the number of tax brackets varies from two to as many as 10 brackets (in Missouri and Calfornia) and 12 brackets (in Hawaii). The marginal tax rates in these brackets also vary considerably. California has the highest, maxing out at 13.3%.

State income tax regulations may or may not mirror federal rules. For example, some states allow residents to use the federal personal exemption and standard deduction amounts for figuring state income tax, while others have their own exemption and standard deduction amounts.

How to Find Your Tax Bracket

There are numerous online sources to find your specific federal income tax bracket. The IRS makes available a variety of information, including annual tax tables that provide highly detailed tax information-based filing statuses in increments of $50 of taxable income up to $100,000.

Other websites provide tax bracket calculators that do the math for you, as long as you know your filing status and taxable income. Your tax bracket can shift from year to year, depending on inflation adjustments and changes in your income and status, so it's worth checking on an annual basis.

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