A tax bracket shows your tax rate based on income. The U.S. has a progressive tax system, where the tax rate increases with taxable income.
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Understanding federal income tax brackets
Federal income tax brackets are based on taxable income, and they’re progressive, which means that as your taxable income increases, so does your tax rate.
The brackets are a way to assign a tax rate for a group of people. The amount that you earn will fall in a range that has a specific tax rate.
Low incomes result in lower income tax rates, while high incomes result in higher income tax rates. Again, the tax rates apply to your taxable income, not your gross income.
Take the following steps to determine your taxable income and federal income tax rate:
Start by calculating your gross income.
Be sure to include all of the income that you’ve earned, such as from your job, side hustles, business, rental properties, investments, and any other source.
Subtract tax adjustments to get your adjusted gross income (AGI).
You can subtract certain expenses, payments, contributions, or fees from your total income. This will give you your adjusted gross income (AGI).
Subtract tax credits and tax deductions from your adjusted gross income (AGI).
From family and dependent credits to investment-related deductions, there are several credits and deductions available.
The number you have now is your taxable income.
Compare it to the brackets to see what your federal income tax rate is.
Capital gains, self-employment, and other types of income can have different tax rates. It can get complicated, so it’s best to consult with a tax professional. Understanding how to figure out your tax bracket and taxable income will give you an idea of where you stand.
Tax filing status
Your federal income tax rate will also be determined by your filing status. If you’re married and filing your taxes jointly, the income range is different than someone filing individually.
The following are the five filing statuses:
- Married filing jointly.
- Married filing separately.
- Head of the household.
- Qualifying widow(er) with dependent child.
It’s important to select the right status because it can affect how much you owe in taxes. If you’re unsure of which one to choose, consult with a tax professional.
Current tax brackets
For 2021, which is due April 2022, there are seven tax brackets per the IRS. They’re as follows:
- 37% for individual single taxpayers with incomes greater than $523,600 or $628,300 for married couples filing jointly.
- 35% for incomes over $209,425 or $418,850 for married couples filing jointly.
- 32% for incomes over $164,925 or $329,850 for married couples filing jointly.
- 24% for incomes over $86,375 or $172,750 for married couples filing jointly.
- 22% for incomes over $40,525 or $81,050 for married couples filing jointly.
- 12% for incomes over $9,950 or $19,900 for married couples filing jointly.
- 10% for incomes of $9,950 or less or $19,900 for married couples filing jointly.
Every year, tax brackets change for inflation.
Frequently asked questions
Is my tax bracket based on gross income?
No, tax brackets are based on taxable income, which is the amount when you subtract allowable deductions from your gross income.
How can I lower my tax bracket?
It may be difficult. However, you can get married, open an IRA, buy a property, or start a business. The key things to look for are tax credits and tax deductions.
Are there different types of taxes?
Yes, there’s income tax, capital gains tax, excise tax, sales tax, payroll tax, and property tax. When it comes to a paycheck, you’ll see federal income tax, payroll tax, and state income tax.
Ready to file your taxes? TurboTax (opens in a new tab) is one of the best-rated and most simple to use software to file your taxes and get assistance with it.
Your tax rate is determined by your taxable income. Since the U.S. has a progressive tax system, your tax rate increases as your income increases. To reduce your taxable income, look for tax credits, deductions, and adjustments that you can make.
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About David Em
David Em is the founder of More Money More Choices, which he launched to help you take control of your finances and build your dream life. Before More Money More Choices, David worked in leadership positions in the finance industry.