What is a Tax Bracket?

Did you know not everyone or every dollar earned is taxed the exact same amount?

This is because the United States tax system aims to be progressive. A progressive tax system tries to collect more tax from those who earn more. In essence, a million dollar earner pays more total tax, as well as a higher percentage of their income in tax, than someone who earns far less.

What is a Tax Bracket?

One of the ways our tax system achieves this is through tax brackets. A tax bracket is simply a range of incomes that are taxed at a set rate based on your taxable income.

There are seven tax brackets of varying size, with the lowest bracket being subject to a 10% marginal tax rate and the highest being subject to 37% marginal tax rate. Your marginal tax rate will be dependent upon your taxable income within the brackets.

How Do I Know What Tax Bracket I’m In?

Let’s see how this works in real life. If you’re a single filer who earns $60,000 a year after you take all the necessary exemptions, adjustments and deductions, the first $9,950 in earnings will be taxed 10%. From $9,951 to $40,525 you will be taxed 12%. On the rest, you’ll be taxed 22%. You are in the 22% tax bracket, though your effective tax rate will be much lower.

If you are married filing jointly, the first $19,900 will be taxed 10%. Any amount over $19,900 to $81,050 is taxed at 12%.

Earlier, I mentioned that there were exemptions, adjustments, and deductions. The income you earned from your job is considered ordinary or gross income, but you are taxed on your adjusted gross income, which is your income minus those exemptions, adjustments, and deductions.

When you know your tax bracket, you can easily calculate how valuable different tax deductions are for you. If you are in the 22% tax bracket, a $1,000 deduction will reduce your tax liability by $220.

Not all of your income is taxed based on these brackets. If you have long-term capital gains and qualified dividends, you will be taxed at 0%, 15%, or 20% depending on your income. If you have a short-term gain, it will be taxed as ordinary income using your marginal tax rate.

So My Tax Brackets Are Different From Last Year?

Each new tax year the income thresholds for each tax bracket are updated. The seven tax bracket percentages have not been changed since tax year 2018.

The current tax brackets are: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

The income thresholds for these brackets kick are below in the chart:

Understanding how tax brackets work, as well as which bracket you are in, can help you make better informed financial decisions, but you don’t need to know how to calculate tax brackets when you use TurboTax. TurboTax will automatically figure out your tax bracket based on your information, and give you the tax deductions and credits you deserve based on your entries.

If you have questions you can connect live via one-way video to a TurboTax Live tax expert to get your tax questions answered at tax-time. TurboTax tax experts are available in English and Spanish year-round and can even review, sign, and file your tax return or you can even fully hand your taxes over to them. All from the comfort of your home.