They may not be as exciting as fantasy football or March Madness tournament brackets, but federal income tax brackets are part of a progressive tax system that ensures all taxpayers pay the same rates on the same levels of taxable income. This means people with higher incomes pay higher taxes on a portion of their income while people with low incomes pay a lower overall percentage of their income to federal taxes.
A good way to think of it is your tax bracket (also called your “marginal tax rate”) is the rate you pay on your highest dollar of taxable income—it isn’t the rate you pay on all of your taxable income. That’s called your effective tax rate—which is more like an average tax rate that takes into account each bracket rate your taxable income falls into.
So, being “in” the 22% federal income tax bracket if you make $40,000 per year doesn’t mean you pay 22 percent on each of those forty-thousand dollars (whew!). Instead, a tax bracket shows you the rate you’ll pay for each part of your income that falls within each bracket’s dollar range.
Example
Here’s an example using the 2018 tax brackets.
2018 Federal Income Tax Brackets for Single Filers
| Tax Rate | Taxable Income | Tax Owed |
| 10% | $0 to $9,525 | 10% of taxable income |
| 12% | $9,526 to $38,700 | $952.50 plus 12% of the amount over $9,525 |
| 22% | $38,701 to $82,500 | $4,453.50 plus 22% of the amount over $38,700 |
| 24% | $82,501 to $157,500 | $14,089.50 plus 24% of the amount over $82,500 |
| 32% | $157,501 to $200,000 | $32,089.50 plus 32% of the amount over $157,500 |
| 35% | $200,001 to $500,000 | $45,689.50 plus 35% of the amount over $200,000 |
| 37% | $500,001 or more | $150,689.50 plus 37% of the amount over $500,000 |
Let’s say Sandra makes $115,000 of taxable income and files as a single person in 2018. This is the breakdown of how she will pay federal income tax based on her position in the 24 percent tax bracket:
Sandra pays 10 percent on the first $9,525 of her income; plus 12 percent on the amount between $9526 and $38,700; plus 22 percent on the amount between $38,701 and $82,500; plus 24 percent on the amount between $82,501 and $157,500.
The math works like this:
First tax bracket: $9,525 X 10% = $952.50
Second tax bracket: ($38,700 – $9,525) X 12% = $3,501
Third tax bracket: ($82,500 – $38,700) X 22% = $9,636
Fourth tax bracket: ($115,000 – $82,501) X 24% = $7,799.76
Total income tax paid: $21,889.26
Tax Bracket Myth Busting
There is an urban myth that says you should be wary of making more income because that will push you into a higher tax bracket and you’ll end up keeping less money in the end by paying an overall higher tax rate.
Don’t let this myth fool you. As the math in the example above shows, each dollar earned only affects the tax rate (i.e. taxes owed) on additional income but does not change the rate applied to dollars in the lower tax brackets. So, if you get a raise from earning $38,000 to earning $40,000, you only pay a higher tax rate on those last additional $1,300.
Tax bracket rates can change each year and often do based on tax policy. Be sure to use the latest tax software or consult a tax professional when filing your taxes to ensure you pay the correct amount.
« Return to "Tax Planning"
