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.

Key Takeaways

  • There are currently seven federal tax brackets in the U.S., with rates ranging from 10% to 37%.
  • The U.S. tax system is progressive, with lower brackets paying lower rates and higher brackets paying higher ones.
  • Unless your income lands you in the lowest tax bracket, you are charged at multiple rates as your income rises, rather than just at the rate of the bracket into which you fall.

Understanding Tax Brackets

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 37%, with the dollar ranges in each varying for single filers, married joint filers (and qualifying widow[er]s), married filing separately filers, and head of household filers, resulting in 28 effective tax brackets.

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

Let’s take an example based on the rates for tax year 2020. Single filers who have less than $9,875 in taxable income are subject to a 10% income tax rate (the lowest bracket). Single filers who earn more than this amount will have their first $9,875 in earnings taxed at 10%, but their earnings past that cutoff point and up to $40,125 are subjected to a 12% rate, the next bracket. Earnings from $40,125 to $84,200 are taxed at 22%, the third bracket. And so on.

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

 Single Taxable Income Tax Brackets and Rates for 2020

Rate Taxable Income Bracket Tax Owed
 
10%
$0 to $9,875 10% of taxable income
 
12%
$9,876–$40,125 $987.50 plus 12% of the excess over $9,875
 
22%
$40,126–$85,525 $4,617.50 plus 22% of the excess over $40,125
 
24%
$85,526–$163,300 $14,605.50 plus 24% of the excess over $85,525
 
32%
$163,301–$207,350 $33,271.50 plus 32% of the excess over $163,300
 
35%
$207,351–$518,400 $47,367.50 plus 35% of the excess over $207,350
 
37%
Over $518,400  
$156,235 plus 37% of the excess over $518,400

Married Filing Jointly Taxable Income Tax Brackets and Rates for 2020

Rate Taxable Income Bracket Tax Owed
 
10%
$0 to $19,750 10% of taxable income
 
12%
$19,751–$80,250 $1,975 plus 12% of the excess over $19,750
 
22%
$80,251–$171,050 $9,235 plus 22% of the excess over $80,250
 
24%
$171,051–$326,600  
$29,211 plus 24% of the excess over $171,050
 
32%
$326,601–$414,700 $66,543 plus 32% of the excess over $326,600
 
35%
$414,701–$622,050 $94,735 plus 35% of the excess over $414,700
 
37%
Over $622,050 $167,307.50 plus 37% of the excess over $622,050

Tax Rates vs. 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 a percentage at which income is taxed; each tax bracket has a different tax rate (10%, 12%, 22%, etc.), referred to as the marginal rate. However, 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. The term for this is the effective tax rate. Here’s how it works.

Consider the following tax responsibility for a single filer with a taxable income of $50,000 in 2020:

  • The first $9,875 is taxed at 10%: $9,875 × 0.10 = $987.50
  • Then $9,876 to $40,125, or $30,250, is taxed at 12%: $30,250 × 0.12 = $3,630
  • Finally, the top $9,875 (what’s left of the $50,000 income) is taxed at 22%: $10,524 × 0.22 = $2,172.50

Add the taxes owed in each of the brackets, and you get $987.50 + $3,630 + $2,172.50 = $6,790.

Result: This individual’s effective tax rate is approximately 13.5% of income.

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, while low-income individuals—those 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 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 is designed with help for lower-income taxpayers in mind. Taxes you pay on 401(k) withdrawals, for instance, are also based on tax brackets.

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, 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.

Negatives

Opponents of tax brackets and progressive tax schedules argue that everyone, regardless of income or economic status, is equal under the law 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 go on to 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 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 in taxes 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 12% in December 2012, the personal savings rate suddenly dropped to 5.8% by February 2013. However, as of February 2021, the rate had resurged to 13.6%.

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 16th Amendment to the Constitution—which established Congress’ right to levy a federal income tax—was ratified in 1913. 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 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 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, and we have come full circle and are back to seven brackets, a structure that was retained by the 2017 Tax Cuts and Jobs Act (TCJA).

State Tax Brackets

Some states have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee previously only taxed investment and interest income, but that practice was repealed on Jan. 1, 2021. Meanwhile, New Hampshire’s tax on investment and interest income will expire in 2024.

In 2020, nine states have a flat rate structure, with a single rate applying to a resident’s income: Colorado (4.63%), Illinois (4.95%), Indiana (3.23%), Kentucky (5.0%), Massachusetts (5.05%), 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 Missouri and California) 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, 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 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.

Tax Bracket FAQs

What Are the Federal Tax Brackets for Tax Year 2020?

The top tax rate remains 37% for individual single taxpayers with incomes greater than $518,400 ($622,050 for married couples filing jointly). Below are the other brackets:

  • 35%, for incomes over $207,350 ($414,700 for married couples filing jointly)
  • 32%, for incomes over $163,300 ($326,600 for married couples filing jointly)
  • 24%, for incomes over $85,525 ($171,050 for married couples filing jointly)
  • 22%, for incomes over $40,125 ($80,250 for married couples filing jointly)
  • 12%, for incomes over $9,875 ($19,750 for married couples filing jointly)

The lowest rate is 10% for incomes of single individuals with incomes of $9,875 or less ($19,750 for married couples filing jointly).

Did Tax Tables Change for 2021?

Yes. Each year, the IRS adjusts the tax brackets to account for inflation. Below are the income thresholds for tax year 2021.

The top tax rate remains 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). Below are the other rates:

  • 35%, for incomes over $209,425 ($418,850 for married couples filing jointly)
  • 32%, for incomes over $164,925 ($329,850 for married couples filing jointly)
  • 24%, for incomes over $86,375 ($172,750 for married couples filing jointly)
  • 22%, for incomes over $40,525 ($81,050 for married couples filing jointly)
  • 12%, for incomes over $9,950 ($19,900 for married couples filing jointly)

The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).

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

For tax year 2020, the highest earners in the U.S. pay a 37% tax rate on all income made beyond $518,400 ($622,050 for married couples filing jointly).

How Do I Calculate My Tax Bracket?

To estimate which tax bracket your earnings will fall under, you could do the math yourself by using the calculation above or visit the IRS website, which provides highly detailed tax filing statuses in increments of $50 of taxable income up to $100,000.