Understanding how tax brackets work

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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 has been updated for the 2018 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 2018 taxes, which will be due in April 2019.

2018 Marginal Tax Rates

Taxable Income by Filing Status

Marginal Tax Rate

Single Married Filing Jointly Head of Household

Married Filing Separately

10% $0–$9,525 $0–$19,050 $0–$13,600 $0–$9,525
12% $9,526–$38,700 $19,051–$77,400 $13,601–$51,800 $9,526–$38,700
22% $38,701–$82,500 $77,401–$165,000 $51,801–$82,500 $38,701–$82,500
24% $82,501–$157,500 $165,001–$315,000 $82,501–$157,500 $82,501–$157,500
32% $157,501–$200,000 $315,001–$400,000 $157,501–$200,000 $157,501–$200,000
35% $200,001–$500,000 $400,001–$600,000 $200,001–$500,000 $200,001–$300,000
37% $500,001 and over $600,001 and over $500,001 and over $300,001 and over

Marginal tax rates

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

In 2017, Joe earned $9,000 of taxable income. His filing status was single. For 2017, the lowest individual income tax rate was 10% for single filers with taxable income of $9,325 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 2017, the second-lowest tax bracket covered a range of income between $9,325 and $37,950 in income and established a tax rate of 15%. Joe’s taxable income placed him in the 15% bracket. However, that doesn’t mean paid 15% on all his taxable income.

Instead, all his taxable income within the 10% bracket ($9,325) was taxed at 10%. He only paid 15% on the portion of his taxable income that bumped him into the 15% tax bracket — the remaining $675. Joe’s marginal tax rate was 15%, because that’s the highest rate that applied to his income.

 

How tax reform affected tax brackets

The tax reform law adopted in December 2017 significantly changed tax rates and tax brackets.

The number of brackets remains the same for the 2018 tax year, but the rates have changed for each bracket. And in addition to changing the tax rate, tax reform also changed the income ranges, so for 2018 you’d need to earn more to move up a bracket.

For example, in 2017, single taxpayers moved from the 10% tax bracket to the 15% tax bracket after earning more than $9,325. In 2018, a single taxpayer won’t move to the higher bracket until earning more than $9,525.

If you make $0, you’re in the lowest tax bracket. If your 2017 income exceeded $418,400 as a single filer or $470,700 when married filing jointly, you were in the highest tax bracket. After tax reform, taxpayers in 2018 move into the highest tax bracket after earning more than $500,000 for single filers or $600,000 for married filing jointly filers.

For taxpayers in the highest bracket in 2018, every dollar earned over $500,000 (single) or $600,000 (married filing jointly) will all be taxed at 37%, which is now the highest rate, compared to 2017’s 39.6%.

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 2018 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. Credit Karma Tax®, a free online tax-filing service, can help you identify credits and deductions you may be eligible for, based on the information you provide.


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.