Understanding how tax brackets work

Business man and woman riding an escalator upward, while the woman reads about how tax brackets work on her mobile phone.Image: Business man and woman riding an escalator upward, while the woman reads about how tax brackets work on her mobile phone.

In a Nutshell

The word “bracket” may immediately call sports to mind. But a different kind of bracket has a bigger effect on your life than the teams playing in your favorite tournament — your tax bracket plays a key role in determining how much federal income tax you owe every year.
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This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It has been updated for the 2020 tax year.

Do you know your tax bracket?

If you know more about sports brackets than your federal income tax bracket, you’re not alone.

Because the U.S. tax system is progressive — meaning the more you earn, the more you’re likely to pay in taxes — it can be difficult to understand how tax brackets work, especially once you throw in the idea of a marginal tax rate. Let’s look at some information that could help.

Tax bracket basics

A tax bracket is basically a range of incomes that the government taxes at a particular rate. Because the U.S. tax code has seven tax brackets, it’s possible for more than one tax rate to apply to your income. The highest tax bracket that applies to your income determines your marginal tax rate.

Here are the federal income tax brackets for 2020 taxes, which will be due in April 2021.

Federal tax brackets and rates for 2020

Tax rate Single Married filing jointly Head of household Married filing separately
10% $0–$9,875 $0–$19,750 $0–$14,100 $0–$9,875
12% $9,876–$40,125 $19,751–$80,250 $14,101–$53,700 $9,876–$40,125
22% $40,126–$85,525 $80,251–$171,050 $53,701–$85,500 $40,126–$85,525
24% $85,526–$163,300 $171,051–$326,600 $85,501–$163,300 $85,526–$163,300
32% $163,301–$207,350 $326,601–$414,700 $163,301–$207,350 $163,301–$207,350
35% $207,351–$518,400 $414,701–$622,050 $207,351–$518,400 $207,351–$311,025
37% $518,401 and more $622,051 and more $518,401 and more $311,026 and more

Marginal tax rates

Here’s an example of how marginal tax rates and tax brackets work to determine how much tax you owe.

In 2020, Joe earned $9,000 of taxable income. His filing status was single. For 2020, the lowest individual income tax rate was 10% for single filers with taxable income of $9,875 or less. Joe fell into the 10% tax bracket, meaning all his taxable income was taxed at 10%.

Now let’s tweak the scenario a bit.

Joe now earns $10,000. In 2020, the second-lowest tax bracket covered a range of income between $9,876 and $40,125 and established a tax rate of 12%. Joe’s taxable income placed him in the 12% bracket. However, that doesn’t mean paid 12% on all his taxable income.

Instead, all his taxable income within the 10% bracket ($9,875) was taxed at 10%. He only paid 12% on the portion of his taxable income that bumped him into the 12% tax bracket — the remaining $125. Joe’s marginal tax rate was 12%, because that’s the highest rate that applied to his income.

How are tax brackets set?

Tax brackets are set by law. Congress can lower taxes by either lowering the rates at which income in each bracket is taxed, or by changing the income ranges for tax brackets so that you can earn more money before moving up to a higher bracket.

Congress can raise taxes by raising rates, or by reducing the amount of money you need to make before moving up into a higher tax bracket.

The IRS typically makes fairly small annual adjustments to tax brackets to compensate for inflation. So the income range for each tax rate can change from year to year without intervention from Congress.

How do you figure out what tax bracket you’re in?

Your taxable income determines your tax bracket. Taxable income is your total income (both earned and unearned) minus income adjustments and tax deductions (such as the standard deduction or itemized deductions). If you earn $10,000 in 2020 but are eligible for $2,000 in deductions, your taxable income would be just $8,000, and you’d fall within the lowest tax bracket.

What counts as taxable income?

Claiming all your adjustments and deductions to reduce your taxable income can lower your tax bracket — and possibly reduce your tax bill.

Bottom line

Both your tax bracket and your tax rate influence how much you’ll pay in taxes. As you earn more money, you may move into a higher tax bracket. The income in the range of that higher bracket (the amount over the prior bracket’s threshold) is taxed at a higher rate. By claiming deductions, you can keep your income in a lower tax bracket to pay less in taxes overall.

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.

About the author: Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbo… Read more.