Understanding Tax Brackets, With Examples and Their Pros and Cons

Tax Bracket

Candra Huff / Investopedia

What Is a Tax Bracket?

A tax bracket refers to a range of incomes subject to a certain income tax rate. Tax brackets are part of a progressive tax system, in which the level of tax rates 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.

For tax years 2022 and 2023, there are seven federal tax brackets, with rates ranging from 10% to 37%. Read on to learn the details.

Key Takeaways

  • There are currently seven federal tax brackets in the United States, with rates ranging from 10% to 37%.
  • The U.S. tax system is progressive, with people in lower brackets taxed at lower rates and those in higher brackets taxed at higher ones.
  • Unless your total income fits in just the lowest tax bracket, you are charged at multiple rates, according to the additional brackets into which your income flows.
  • You are not simply taxed at the rate of the bracket into which your total income falls; therefore, you effectively pay less than that rate.
  • Typically, the IRS adjusts tax brackets for inflation every year.

Understanding Tax Brackets

The United States uses a progressive tax system, meaning that it uses a marginal tax rate to determine taxes owed. A marginal tax rate determines the tax paid on an additional dollar of income that takes a taxpayer into a higher tax bracket.

The marginal tax rate increases as a taxpayer’s income increases. There are different tax rates for various levels of income. In other words, taxpayers will pay the lowest tax rate on the first “bracket” or level of taxable income, a higher rate on the next level, and so on.

The Internal Revenue Service (IRS) announces any changes to tax brackets and rates annually. For tax years 2022 and 2023, there are seven federal tax brackets. Each is assigned a different rate, ranging from 10% to 37%, and range of taxable income per bracket. The dollar ranges in each bracket vary for single filers, married joint filers (and qualifying widow[er]s), married filing separately filers, and head of household filers.

When determining which tax bracket to use, a taxpayer should first calculate their taxable income, including earned and investment income minus adjustments and deductions.

Tax Rates vs. Tax Brackets

Tax brackets and tax rates are both used to calculate the total taxes owed. However, while they might sound similar, they are, in fact, distinctly different from each other.

A tax rate is a percentage at which income is taxed, while each tax bracket is a range of income with a different tax rate. These rates are 10%, 12%, or 22% and higher, and are referred to as the marginal rate.

Most taxpayers—all except those who fall squarely into only the minimum bracket—have income that is taxed progressively. This means that their income is subject to multiple rates beyond the nominal rate of their tax bracket.

For example, an annual income of $100,000 fits the 24% tax bracket for tax years 2022 and 2023. However, the entire $100,000 isn't taxed at 24%. It's taxed at the different rates aligned with the various brackets of income that cover the segments of income up to $100,000. So, ultimately a taxpayer pays less than they would if the total income were taxed at 24%.

Thus, a taxpayer’s tax bracket does not necessarily reflect the percentage of their income that they will pay in taxes. The term for this is the effective tax rate.

Tax brackets are adjusted each year for inflation, using the Consumer Price Index (CPI).

Federal Income Tax Brackets and Tax Rates for 2022 and 2023

2022 Marginal Tax Rates by Income and Tax Filing Status
Tax Rate Income Tax Bracket for Single Filers Income Tax Bracket for Married Couples Filing Jointly  Income Tax Bracket for Married Couples Filing Separately Income Tax Bracket for Head of Household Filers
10% $10,275 or less  $20,550 or less  $10,275 or less  $14,650 or less
12%  $10,276 to $41,775  $20,551 to $83,550  $10,276 to $41,775 $14,651 to $55,900
22%  $41,776 to $89,075  $83,551 to $178,150  $41,776 to $89,075 $55,901 to $89,050
24%  $89,076 to $170,050  $178,151 to $340,100  $89,076 to $170,050 $89,051 to $170,050
32% $170,051 to $215,950  $340,101 to $431,900  $170,051 to $215,950 $170,051 to $215,950
35%  $215,951 to $539,900  $431,901 to $647,850  $215,951 to $323,925 $215,951 to $539,900
37%  Over $539,900  Over $647,850  Over $323,925 Over $539,900

Source: IRS

2023 Marginal Tax Rates by Income and Tax Filing Status
Tax Rate Income Tax Bracket for Single Filers Income Tax Bracket for Married Couples Filing Jointly  Income Tax Bracket for Married Couples Filing Separately Income Tax Bracket for Head of Household Filers
10% $11,000 or less  $22,000 or less  $11,000 or less  $15,700 or less
12%  $11,001 to $44,725  $22,001 to $89,450  $11,001 to $44,725 $15,701 to $59,850
22%  $44,726 to $95,375  $89,451 to $190,750  $44,726 to $95,375 $59,851 to $95,350
24%  $95,376 to $182,100  $190,751 to $364,200  $95,376 to $182,100 $95,351 to $182,100
32% $182,101 to $231,250  $364,201 to $462,500  $182,101 to $231,250 $182,101 to $231,250
35%  $231,251 to $578,125  $462,501 to $693,750  $231,251 to $346,875 $231,251 to $578,100
37%  Over $578,125  Over $693,750  Over $346,875 Over $578,100

Source: IRS

Example of Tax Brackets

Below is an example of marginal tax rates for a single filer based on 2022 tax rates.

  • Single filers with less than $10,275 in taxable income are subject to a 10% income tax rate (the lowest bracket).
  • Single filers who earn more than $10,275 will have the first $10,275 taxed at 10%, but earnings beyond the first bracket and up to $41,775 will be taxed at a 12% rate (the next bracket).
  • Earnings from $41,776 to $89,075 are taxed at 22%, the third bracket.

Consider the following tax responsibility for a single filer with a taxable income of $50,000 in 2022:

  • The first $10,275 is taxed at 10%: $10,275 × 0.10 = $1,027.50
  • Then $10,276 to $41,775, or $31,499, is taxed at 12%: $31,499 × 0.12 = $3,779.88
  • Finally, the remaining $8,225 (what’s left of the $50,000 income) is taxed at 22%: $8,225 × 0.22 = $1,809.50

Add the taxes owed in each of the brackets:

  • Total taxes: $1,027.50 + $3,779.88 + $1,809.50 = $6,616.88

The individual’s effective tax rate is approximately 13% of income:

  • Divide total taxes by annual earnings: $6,616.88 ÷ $50,000 = 0.13
  • Multiply 0.13 by 100 to convert to a percentage, which is 13%.

Taxes that you pay on 401(k) withdrawals are also based on tax brackets.

Pros and Cons of Tax Brackets

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

Pros
  • Higher-income individuals are more able to pay income taxes and keep a good living standard.

  • Low-income individuals pay less, leaving them more to support themselves.

  • Tax deductions and credits give high-income individuals tax relief, while rewarding useful behavior, such as donating to charity.

Cons
  • Wealthy people end up paying a disproportionate amount of taxes.

  • Brackets make the wealthy focus on finding tax loopholes that result in many underpaying their taxes, depriving the government of revenue.

  • Progressive taxation leads to reduced personal savings.

Positives

Proponents of tax brackets and progressive tax systems contend that individuals with high incomes are better able to pay income taxes while maintaining a relatively high standard of living. In contrast, low-income individuals who struggle to meet their basic needs should be subject to less taxation.

Proponents stress that it is only fair that wealthy taxpayers pay more in taxes than the poor and the 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 is designed with help for lower-income taxpayers in mind.

Supporters 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 or tax credits for outlays such as charitable contributions.

The higher income that taxpayers realize can then be funneled back into the economy. Furthermore, tax brackets have 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.

Negatives

Opponents of tax brackets and progressive tax schedules argue that everyone is equal under the law regardless of income or economic status and that 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 that wealthy people pay and the amount of government representation that they receive. Some even point out that citizens get only 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 leads some wealthier individuals to exploit tax law loopholes to find creative ways to shelter earnings and assets. They can actually end up paying less in taxes than the less well-off, depriving the government of revenue. For example, some American companies have relocated their headquarters abroad to avoid or reduce their U.S. corporate taxes.

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. 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.

In 1872, Congress rescinded the income tax. It didn’t reappear until the ratification of the 16th Amendment to the U.S. Constitution in 1913 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 56 brackets, ranging from 6% to 77%. In 1944, the top rate hit 91%. But it was brought back down to 70% in 1964 by then-President Lyndon B. Johnson. In 1981, then-President Ronald Reagan initially brought the top rate down to 50%.

Then, in the Tax Reform Act of 1986, brackets were simplified, and the rates were reduced so that, in 1988, there were only two brackets: 15% and 28%. This system lasted only until 1991, when the third bracket of 31% was added. Since then, additional brackets have been implemented, and we have come full circle and are back to seven brackets.

State Tax Brackets

Some states have no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire doesn’t tax earned wages, but it does tax investment income and interest. However, it is set to phase out those taxes starting in 2023, bringing the number of states with no income tax to nine by 2027.

In 2022, nine states had a flat rate structure, with a single rate applying to a resident’s income: Colorado (4.55%), Illinois (4.95%), Indiana (3.23%), Kentucky (5.0%), Massachusetts (5.0%), Michigan (4.25%), North Carolina (5.25%), Pennsylvania (3.07%), and Utah (4.95%).

In other states, the number of tax brackets varies from three to as many as nine (in California, Iowa, and Missouri) and even 12 (in Hawaii). The marginal tax rates in these brackets also vary considerably. California has the highest, maxing out at 12.3%.

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. In contrast, others have their own exemption and standard deduction amounts.

How to Find Your Own 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 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.

What Are the Federal Tax Brackets for 2022?

The top tax rate is 37% for individual single taxpayers with incomes greater than $539,900 (or more than $647,850 for married couples filing jointly). The other rates are:

  • 35%, for incomes over $215,950 ($431,900 for married couples filing jointly)
  • 32% for incomes over $170,050 ($340,100 for married couples filing jointly)
  • 24% for incomes over $89,075 ($178,150 for married couples filing jointly)
  • 22% for incomes over $41,775 ($83,550 for married couples filing jointly)
  • 12% for incomes over $10,275 ($20,550 for married couples filing jointly)

The lowest rate for the 2022 tax year is 10% for single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).

How Much Can I Earn Before I Pay 40% Tax?

Currently, there is no 40% tax bracket. For 2022, the highest earners in the United States pay a top rate of 37% federal tax on all income made beyond $539,900 (single filers) and $647,850 (married couples filing jointly).

How Do I Calculate My Tax Bracket?

To estimate which tax brackets your earnings will fall under, you could do the math yourself by using the tables shown above or by visiting the Internal Revenue Service (IRS) website, which provides highly detailed tax filing statuses in increments of $50 of taxable income up to $100,000.

The Bottom Line

The federal tax system in the U.S. is progressive. Taxpayers who fall into lower brackets pay lower rates than taxpayers in higher brackets. In 2022 and 2023, there are seven federal tax brackets, with rates ranging from 10% to 37%.

Unless your taxable income lands you in the lowest tax bracket, you are charged at multiple rates as your income rises. Your entire income is not subject to the rate of the bracket classified for your total income level.

Article Sources
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