By Hrishikesh Menon. Edited by Arjun Chandrasekar.
Tax brackets are essentially categories of tax rates based on a person or multiple people’s income. It is a progressive tax system where the rates increase as the income increases. The income ranges differ for each type of tax filer (single, married joint, head of household, etc).
What are the Tax Brackets?
The tax rates range from 10%-37% and the incomes range from $0-$622,050 or higher. Like stated above, the brackets are different for each type of filer. These are the brackets for a single filer: 10% for income within $0-$9,875, 12% for income within $9,876-$40,125, 22% for income within $40,126-$85,525, 24% for income within $85,526-$163,300, 32% for income within $207,351-$518,400, and 37% for income over $518,400. For married couples filing jointly: 10% for income within $0-$19,750, 12% for income within $19,751-$80,250, 22% for income within $80,251-$171,050, 24% for income within $171,051-$326,600, 32% for income within $326,601-$414,700, 35% for income within $414,701-$622,050, 37% for income over $622,050. There are a few other types of filings but single and married joint filings are the most common.
How the Tax Rates Work
Many confuse the terms tax rate and tax bracket as they sound the same but they are not. Each tax bracket has a specific tax rate and most taxpayers, except ones who are in the lowest bracket, are taxed progressively which means they might have to pay multiple rates at once but the total or effective tax rate would not be a rate stated in any bracket. To facilitate the concept, here’s an example. Say Mark, a single adult, files with $100,000 taxable income. The first $9,875 is taxed at 10%, which is $987.50. Then the next bracket, $9,876-$40,125 or $30,2499, is taxed at 12% which will be $3,630. The next bracket, $40,126-$85,525 or $45,400, is taxed at 22% which is $9,988. Finally, the remaining $14,475 is taxed at 24% which is $3,474. The total would be $987.50+$3,630+$9,988+$3,474=$18,079.50 which makes the effective tax rate around 18%. Since the income is within the 24% bracket, the marginal tax rate for this filer’s income would be 24%.
State Tax Brackets
The tax rates and brackets stated above are the brackets which apply to all U.S taxpayers. There are additional state enforced tax brackets in some states but it is more fluid than the national tax bracket system. Some states such as Texas, Alaska, Florida, Nevada, etc, do not have an income tax system. Some have a fixed income tax rate such as Colorado (4.63%), Kentucky (5.0%), Pennsylvania (3.07%), etc. Then there are states like Missouri, California, or Hawaii which have tax brackets ranging from 3 to 12. Taxpayers in states with an income tax system have to pay federal and state tax together. Going back to the example of Mark who earns $100,000: only considering federal tax, he will pay $18,079.50 in taxes but if he lives in Massachusetts, which has a fixed income tax rate of 5.05%, Mark would have to pay around $5,000 more in taxes making his net income around $69,000.
The federal tax bracket system is divided into 7 brackets ranging from 10%-37% with income ranging from $0 to more than $500,000. The tax rate of the bracket in which the taxable income falls within is called the marginal tax rate but the progressive tax rate, which includes multiple brackets unless the income falls under the lowest bracket, is called the effective tax rate. Depending on the state the taxpayer lives in, the taxable income will include a state tax rate.