How Tax Brackets Work
Death, taxes, and your parents beginning their voicemails telling you that it's them as if you can't tell who left the voicemail, and they don't have the most recognizable voices you've ever heard. Those are the only three things in life that are certain.
There are many types of taxes (too damn many), but income taxes get the most attention—and rightfully so. They account for almost 48% of all government revenue in America. To determine how much each taxpayer is responsible for paying, the IRS established tax brackets.
Tax Brackets
Many people know what tax brackets are, but not as many know how they actually work. The U.S. uses a progressive tax system, so the more money you make, the more taxes you pay. Theoretically. We all know the wealthy seem to Eurostep their way around their fair share of tax obligations, but that's a different topic for a different day.
Your tax bracket is the highest tax rate you'll have to pay on your income and is determined by your taxable income. Your taxable income may vary from your regular income because it includes tax credits and deductions. For example, if you make $60,000 per year but have $5,000 in tax deductions, only $55,000 will be taxable.
As of 2022, there are seven tax brackets:
Single
10%: $0 to $10,275
12%: $10,276 to $41,775
22%: $41,776 to $89,075
24%: $89,076 to $170,050
32%: $170,051 to $215,950
35%: $215,951 to $539,900
37%: $539,900 or more
Married, Filing Jointly
10%: $0 to $20,550
12%: $20,551 to $83,550
22%: $83,551 to $178,150
24%: $178,151 to $340,100
32%: $ 340,101 to $431,900
35%: $431,901 to $647,850
37%: $647,851 or more
Married, Filing Separately
10%: $0 to $10,275
12%: $10,276 to $41,775
22%: $41,776 to $89,075
24%: $89,076 to $170,050
32%: $170,051 to $215,950
35%: $215,951 to $323,925
37%: $323,926 or more
How Your Tax Bill Is Calculated
All it takes is a few minutes scrolling social media or reading online comments to realize that a common misconception is that your income is taxed at whatever percentage your bracket is. That's not quite how it works. Different portions of your income are taxed at different rates. Let's imagine that you're single and make $50,000 per year. Instead of all of your income being taxed at 22%, it will be taxed at the following:
The first $10,275 will be taxed at 10%
$10,276 through $41,775 will be taxed at 12%
$41,776 through $50,000 will be taxed at 22%
Instead of paying $11,000 in taxes ($50,000 * 22%), you will only pay around $6,617:
$10,275 * 10% = $1,027.5
$31,499 * 12% = $3,779.88
$8,226 * 22% = $1,809.72
$1,027.50 + $3,779.88 + $1,809.72 = $6,617.10
This is supposed to provide more equality in the tax system. As a result, someone who may fall into a particular bracket by a small amount doesn't have to potentially pay thousands more in taxes. Imagine making $42,000 and having to pay 22% in taxes versus someone who makes $40,000 paying 12%:
$42,000 * 22% = $9,240
$40,000 * 12% = $4,800
Even though you made $2,000 more, you'd end up with $2,440 less after taxes. Nope—couldn't be me. I'd have to pull up on Uncle Sam 'nem.
Determining Your Tax Return
Most companies will automatically have taxes deducted from your paychecks and sent to the IRS for you. If you're self-employed, it's expected that you pay your income tax every quarter. It's easy to forget about taxes when they're not automatically taken from you, so paying quarterly will stop you from having a huge bill once you file the following year. That tax bill will sneak up on you like Apple Music charges.
If you didn't pay enough to cover your total income tax due at the end of the year, you'd owe the IRS the remaining amount. If you paid too much, the IRS will send you what's owed via a tax refund. While tax deductions decrease your taxable income, tax credits will either add to your tax return or subtract from what you owe. For example, if you owe $5,000 in taxes but have $7,000 in tax credits, you'll receive a $2,000 return.