What is a Tax Bracket?

Tax Planning

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. For the 2018 tax year, five out of seven tax rates have changed under the new tax reform law.

There are still 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, but five out of the seven tax rates were lowered by about one to four percent. 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 $9,525 in earnings will be taxed 10%. From $9,526 to $38,700 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 $19,050 will be taxed 10%. Any amount over $19,050 to $77,400 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? 

The new tax law retains the seven tax brackets found in current law, but lowers a number of the tax rates. It also changes the income thresholds at which the rates apply.

The old brackets are: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.

The new brackets will be: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

The income thresholds at which these brackets kick in have changed, as well.

For Married Joint Filers:

For Single Filers:

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 CPA or Enrolled Agent to get your tax questions answered at tax-time.  A TurboTax Live CPA or Enrolled Agent can even review, sign, and file your tax return.

Check back with the TurboTax blog or the TurboTax Tax Reform Center for more tax law updates.

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