Tax Bracket

Updated on January 4, 2024

Tax Bracket Meaning 

Income tax brackets can be defined as the range of incomes that fall under a particular tax rate under progressive taxation. Thus, how much tax an individual has to pay depends on the bracket they belong to, i.e., how much income they earn, after considering deductibles and other adjustments. The aim of tax brackets is to categorize different levels of income and apply progressively higher tax rates to higher income levels.

Tax Bracket

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In the United States, the Internal Revenue Service (IRS) specifies the tax brackets for taxpayers. It is updated annually and adjusted to inflation. Further, the brackets differ for single filers, a married couple filing jointly, a married couple filing separately, and the head of the household. 

Key Takeaways

  • Federal tax brackets are the income divisions subject to respective tax rates.
  • Income brackets are determined by the IRS and help in easier taxation. In addition, it is fair and just that poor people pay less and rich people pay more, but not exorbitantly, thanks to progressive taxation.
  • Every year, the IRS updates the tax brackets for each category – single filers, heads of households, married couples filing separately, married couples filing jointly, and estates and trusts. These updates account for inflation, economic growth, and other conditions.

Tax Bracket Explained 

Tax brackets are important metrics in the progressive tax system and function as the guide to how much an individual is taxed. This is because it is usually considered a fair and just method of taxation, as people are taxed according to the income they earn. In addition, it acts as a relief for people who fall under the lowest income brackets.

A person who comes under a certain bracket must pay the tax at the rate specified for the particular bracket. Also, it doesn’t mean that the total of their income is subject to a single tax rate. Instead, their income is taxed progressively, meaning they are taxed at a particular tax rate as long as they fall under the upper limit of the applicable brackets. So, for example, if Tess earns $20,000 annually, $11,000 would be taxed at 10% and the rest of $9000 at 12%.

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The IRS decides the appropriate brackets every year. It also decides the rate for each bracket. This value is adjusted for inflation and other economic conditions. For example, in cases of extremely unfavorable economic situations, like depression, the brackets are affected.

Let’s have a look at the 2023 tax brackets.

Applicable tax rateSingle filersHeads of householdsMarried couples filing separatelyMarried couples filing jointlyEstates and trusts
10%=< $11,000=< $15,700=< $11,000=<$22,000=<$2,900
12%$11,001 – $44,725$15,701 – $59,850$11,001 – $44,725$22,001 – $89,450
22%$44,726 – $95,375$59,851 – $95,350$44-726 – $95,375$89,451 – $190,750
24%$95,376 – $182,100$95,351 – $182,100$95,376 – $182,100$190,751 – $364,200$2901 – $10,550
32%$182,101 – $231,250$182,101 – $231,250$182,101 – $231,250$364,200 -$462,500
35%$231,251 – $578,125$231,251 – $578,100$231,251 – $346,875$462,501 – $693,750$10,551 – $14,450
37%>$578,126>$578,101>$346,876>$693,751>$14,451

Examples

Let’s discuss some examples to get a better idea.

Example #1

Peter is unmarried and lives alone in his apartment. His annual income is $200,000. He can claim tax deductibles worth $1000. Now let us calculate the tax he has to pay.

Peter’s adjusted gross income (AGI) = (200,000 – 1000) = $199000. Therefore, this amount falls in the 32% bracket.

1: 10% tax:

Hence, $11,000 x 10% = $1,100

2: 12% tax:

$44,725 – $11,001 = $33,724 

Hence, $33,724 x 12% = $4,046.88

3: 22% tax

$95,375 – $44,726 = $50,469

Hence, $50,469 x 22% = $11,142.78

4: 24% tax

$182,100 – $95,376 = $86,724

Hence, $86,724 x 24% = $20,813.76

5: 32% tax

$190,000 – $182,101 = $7,899

Hence, $7,899 x 32% = $2,527.68

Total tax paid (sum in italics) = $39,631.1

Here, it is important to note that if the total taxable income had been taxed at 32%, Peter would’ve paid $60,800. So here, he is saving almost $21,168.9.

Example #2

2022 was a year of higher-than-usual inflation accompanied by a recession. Usually, IRS alters the income brackets every year according to inflation. Thus, more inflation means more adjustments. Inflation usually has a drastic effect on taxation and brackets. The phenomenon called bracket creep or fiscal drag occurs when high economic inflation leads to higher wages for taxpayers, thereby pushing them to the next tax bracket. 

As a result, they will have to pay more without relief from the inflationary pressure. Nevertheless, governments across the globe are taking measures to provide some support to people. For example, the France government estimates that the higher brackets would cost the government approximately 6 billion euros. For Germany, it costs around 12 billion euros.

Tax Bracket vs Effective Tax Rate

Tax rates and brackets are relevant and related concepts. But they are far from the same. 

  • Tax brackets are defined based on the tax rates. Thus, the former combines a range of incomes specified for a particular tax rate. 
  • Both concepts help in the calculation of net tax. Brackets help identify the applicable tax rate, whereas the tax rate determines the tax.
  • If a taxpayer falls under a particular bracket, they have to pay a percentage of income equal to the tax rate as tax.
  • Tax rates are expressed in percentages, whereas brackets are expressed as a range of income in dollars.
  • Also, tax brackets are an important and fair, but not indispensable, feature of the progressive tax system, whereas tax rates are a basic feature of any tax system.

Frequently Asked Questions (FAQs)

What tax bracket am I in?

First, add income from employment, investment, and other sources to understand the respective income brackets. Now, make necessary adjustments such as tax deductions, etc. This is the adjusted gross income. The income range to which this value belongs is the individual’s income bracket.

How do tax brackets work?

Income tax brackets work progressively. First, as the individual’s income rises, they fall across different brackets. Then, their income is taxed at a particular rate until the upper limit of a certain bracket exceeds the net taxable income. That is, a person earning $50,000 will fall in the 22% bracket but will be taxed at 10% till $11,000, 12% from $11,001 to $44,725, and 22% from $44,726 to $50,000.

What tax bracket is 40000?

According to the 2023 tax brackets, $40,000 adjusted gross income falls under the 12% bracket. Therefore, the first $11,000 will be subject to 10% taxation and the balance of $29,000 at 12%. According to the 2023 tax brackets, $40,000 adjusted gross income falls under the 12% bracket. Therefore, the first $11,000 will be subject to 10% taxation and the balance of $29,000 at 12%.

This has been a guide to Tax Bracket and its meaning. Here, we compare it with the effective tax rates and explain its examples. You can learn more about accounting from the following articles –