How Tax Brackets Work

A breakdown of the U.S. income tax system and how your tax bill is calculated each year.
Stefon Walters
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 2020, there are seven tax brackets: Single 10%: $0 to $9,700 12%: $9,701 to $39,475 22%: $39,476 to $84,200 24%: $84,201 to $160,725 32%: $160,726 to $204,100 35%: $204,101 to $510,300 37%: $510,301 or more Married, Filing Jointly 10%: $0 to $19,400 12%: $19,401 to $78,950 22%: $78,951 to $168,400 24%: $168,401 to $321,450 32%: $ 321,451 to $408,200 35%: $$408,201 to $612,350 37%: $612,351 or more Married, Filing Separately 10%: $0 to $9,700 12%: $9,701 to $39,475 22%: $39,476 to $84,200 24%: $84,201 to $160,725 32%: $160,726 to $204,100 35%: $204,101 to $306,175 37%: $306,176 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 $9,700 will be taxed at 10% $9,701 through $39,475 will be taxed at 12% $39,476 through $50,000 will be taxed at 22% Instead of paying $11,000 in taxes ($50,000 * 22%), you will only pay $6,858.50: $9,700 * 10% = $970 $29,775 * 12% = $3,573 $10,525 * 22% = $2,315.50 $9,700 + $3,573 + $2,315.50 = $6,858.50 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 $40,000 and having to pay 22% in taxes versus someone who makes $39,000 paying 12%: $40,000 * 22% = $8,800 $39,000 * 12% = $4,680 Even though you made $1,000 more, you'd end up with $3,120 less after taxes. Nope—couldn't be me. I'd have to pull up on Uncle Sam 'nem and come see 'bout 'em. Determining Your Tax Return The majority of 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 at the end of the year, you didn't pay enough to cover your total income tax due, you'll 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.
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