To attempt to simplify the application of this approach, the lawmakers created income ranges that are taxed at different rates, creating tax brackets. Based on current laws, taxable income (i.e. amount reported on line 43 of Form 1040) ranging from $0 to $8,375 by a single tax filer is taxed at a rate of 10%. The income reported from $8,375 to $34,000 by this same single filer is taxed at a higer rate of 15%. Here are the 2010 tax brackets for single filers:

2010 Federal Income Tax Brackets for Single Filers

Brief History of U.S. Tax Brackets

Since 1913, when the federal income tax was made permanent, we have had tax brackets. Our first set of brackets was fairly simple, with rates ranging from 1% to 7%. This initial set of brackets applied to all tax filers. In the 40s and 50s, different tax brackets were created for Single, Married Filing Jointly, Married Filing Separately, and Head of Household.

The highest federal tax rate ever levied in the U.S. was a whopping 94% for income over $200,000 back in 1944 and 1945. Tax rates and income brackets can change each year, based on new law and inflation adjustments.

“What Tax Bracket Am I In?”

One of the most common questions tax filers have is, “what tax bracket am I in?” We already know, based on the brackets above, that every filer is effectively in every tax bracket, up to their highest. So we can assume that the question really is, “what is my highest tax bracket?” The rate associated with your highest bracket is actually called your marginal tax rate. For instance, if you make $90,000 in 2010, you will have a 28% marginal tax rate.

Does this mean that you will pay 28% of $90,000 in taxes for the year? No. It just means that the highest margin of income you report will be taxed at 28%. This is useful because generally every dollar you add to your current income will be taxed at that highest rate. Likewise, every reduction you make (i.e. tax deductible expense) will generally save you that percentage in tax dollars.

What you might be more interested in knowing though is your effective tax rate. This is the percentage of your taxable income that was actually paid in taxes. To determine your effective tax rate from last year, find your tax return and divide your total tax by your taxable income. Think of this as your average rate across all brackets.

(alancleaver_2000)

Updated Mon., March 22, 2010.

One of the most contentious issues in politics and economics is how America’s income tax burden – who pays the most and least on a yearly basis – is weighted. Countless editorials and op-ed pieces make implicit assumptions one way or the other about who pays the most, but remarkably few include hard, factual data to support those assumptions. The lack of data in much of what passes for analysis of the tax burden is not because the data is unavailable or difficult to obtain. Rather, it appears that data is simply passed over in the rush to express preconceived opinions on the matter. Consequently, public opinion (and perhaps tax policy) is being shaped largely by insinuation, rather than by data. Ultimately, however, how our tax burden is weighted is not a moral or ethical question, but a factual question – and a most important one. Below, we’ll analyze data from the Tax Foundation in detail – who pays the most, who pays the least, and how the progressive nature of American income taxation shapes the outcome. The answers we uncover might surprise you, especially if it is the first time you have seen the information being analyzed.

Progressive Taxation & The Tax Burden

(kevindooley)

The first thing to understand about America’s income tax burden is the progressive nature of its income tax system. “Progressive” is meant here not in the normative sense of “better” but in the quantitative sense of “more.” Basically, America’s income tax system is set up so that individuals (or couples filing jointly) who earn higher yearly incomes will be taxed at a higher rate. Very simply, if you earn more, you pay more. Progressive taxation is codified by the Internal Revenue Code into “brackets”, within which people who earn certain incomes fall and are taxed. Bargaineering recently published an updated list of the marginal income tax brackets for 2010, which is reproduced below:

Contrary to what I originally reported, TurboTax Blog reader Clark A. Wise astutely pointed out in comments the full truth about what these brackets mean. As these are marginal tax rates, the rate in question applies to income above and beyond the stated amount. This means, for example, that if you earn $50,000 in a year, the first $8,375 of it would be taxed at 10%, while the next $25,625 gets taxed at 15% and the remaining $16,000 gets taxed at 25%.

Therefore, you owe $837.5 in tax on the $8,375, while you owe $3,843.75 on the $25,625 and owe $4,000 on the remaining $16,000. In total, if you took no deductions or credits, you owe $8,680 in total federal income taxes.  From here (as Clark noted below in comments) we can go further to calculate what is known is your effective tax rate. You get it by dividing your total income tax  by your total taxable income, which in this case equals .1736 (or about 17%.)

It may also be worth noting that the top marginal tax rate was once much higher than 38%. The Tax Policy Center has an easy-to-read chart of the top marginal tax rates in every year since the income tax was instituted in 1913. During that time, the top marginal rate has been as low as 7% (in 1913) and as high as 92% (from 1952-53.) It was 91% from 1954-63, and more recently, was 70% for the entire decade of the 1970’s. Regardless of the particular year or rate, however, the basic, underlying structure of American taxation was – and still is – progressive.

Who Pays More & Less

(Rob Lee)

It sounds like a relatively simple question: who pays more or less income taxes? That being said, we must careful to define what, exactly, we are trying to answer. The argument is often made that yes, higher income earners pay more in absolute terms (as shown above), but the poor and “middle class” (in whatever income range that is defined to be) pay more relative to their incomes. In other words, someone earning less money and paying, say, the 10% or 15% marginal tax rate misses that money more than someone earning more and paying  the 35% rate, because the latter person still has a lot left over. Of course, it is not clear that this is actually true. Presumably, someone earning several hundred thousand dollars a year has a vastly different lifestyle to support than someone making twenty or thirty, and it’s tough to imagine, even for them, a scenario where their taxed-away income is mere expendable excess. Several hundred thousand dollars could be the combined income of a married doctor and lawyer, each of whom only recently attained high incomes after years of repaying student loans and earning lower incomes in residence studies and internships. However, even if that argument is granted, the question of how the tax burden is weighted is not simply who misses their taxed-away income more. What we are ultimately attempting to answer is which group of people contributes most to the total amount of federal income taxes collected, in absolute terms.

That question is a lot simpler to answer. In fact, the TurboTax blog ran a post on how America pays taxes versus how other wealthy countries pay hints at the answer:

“A look at the data on tax distribution in the United States, for instance, reveals that high income individuals pay an enormously disproportionate amount of total income taxes in the country. The Tax Foundation’s Fiscal Facts report shows that the top 1% of income earners (1,410,710 people) pay 40.42% of all income taxes in the United States. The top 2.5% (5,642,839 people) pay 20.20% of total income taxes, while the top 5% (a combined 7,053,549 people) pay 60%. The top 10% as a whole pays 71.22%, while the bottom 50% of taxpayers account for only 2.89% of all income taxes.”

These numbers can be examined in even more depth. The 1,410,710 people who comprise the top 1% of income earners, for instance, earned $2,008,259 trillion – of which $450,926 billion went to federal income taxes. Overall, the Tax Foundation shows in this graph, the top 1% now pays more total income tax than the bottom 95%. The top 10% as a whole earned $4,227,839 trillion – of which $794,432 billion went to taxes. Of the $1,115,504 trillion of total income taxes collected, the top 10% paid nearly half. This data, updated in 2009, was calculated using income tax returns from 2007 and is the newest data available at time of writing.

It is important to keep in mind that the tax burden being weighted heavily toward high income earners is not a coincidence. Progressive taxation means that America’s income tax system is literally designed to produce such outcomes. Indeed, the Tax Foundation’s Scott Hodges cited, ”…an OECD study released last year showing that the U.S.—not France or Sweden—has the most progressive income tax system among OECD nations.”

The Takeaway

Contrary to general assumptions, low and middle income earners do not pay the bulk of federal income taxes in America. Because our income tax system is progressive, high income earners automatically pay a higher percentage of taxes on their already higher incomes. This has led to a scenario where the top 1% of income earners (and incoming earning couples) now pay more income taxes than the bottom 95% combined. While arguments can be made one way or the other about who should pay more or less, who does pay more or less is a subject about which there can be no confusion.

What Are Tax Brackets

Here in the United states, we have a progressive tax system. As you earn more money, you have a higher tax rate. The amounts within the tax brackets are adjusted for inflation every year. Congress establishes the tax rates and right now the tax brackets are from 10%-35%.

Some people believe that tax brackets only apply to your income from an employer. That’s not true, it includes income from different sources. Tax brackets are based on your taxable income, which can be very different from your gross income, depending on your deductions and personal exemptions.

When you fill out your W-4, try to make it as accurate as possible so your withdrawals can cover your tax obligations.

How Tax Brackets Work

Some people think if they get a raise at a job or earn enough money that puts them in the next tax bracket, they’ll see a huge increase on their taxes. That’s not the case. Your income is not completely taxed at the new tax bracket you fall in. The additional income from a raise will be taxed at the new rate.

We’ll us an example to explain how the tax brackets work. Suppose you’re filing single and have a total of $39,000 in taxable income for 2009. Here’s how your taxes are calculated with the brackets:

• Your first $8350 will be taxed at 10%.
• From there, from $8351 to $33,950 of your taxable income will be taxed at 15%.
• The rest of your income ($5,050) will be taxed at 25%.

So even though you fall into the 25% tax bracket, you’re not paying 25% on all of your taxable income. You will be effectively taxed at a lower rate.