How Do Tax Brackets Really Work?

It’s common knowledge that income earned throughout the year is taxable. But what may not be so clear is exactly how that income is taxed. 

Most Americans have a basic understanding that income is taxed at various rates depending on how much is earned. But other than dreading being put into a “higher tax bracket”, it’s often hard to articulate what that means. Let’s break it down.

What are Tax Brackets?

If you earn income in the United States, you pay federal income taxes based on how much you make. But it’s not just one flat tax rate applied to all your income. Instead, the US uses a progressive tax system with multiple tax brackets that increase as your income goes up. Understanding how these tax brackets work can help you estimate what you’ll owe and plan your taxes smartly.

The federal income tax system has 7 tax brackets currently. Each bracket has a range of income amounts and an assigned tax rate. The brackets start at 10% and go up to 37% for the highest incomes. 

The key thing to know is that you don’t pay the bracket tax rate on your entire income. You only pay each rate for the amount that fits within that bracket’s income range.

How Bracket Tax Rates Work

For example, look at a single filer with $83,000 in taxable income. This person falls into the 22% bracket, since they are over the minimum $53,000 threshold. But they don’t pay a flat 22% on the full $83,000 they made. 

First, they pay 10% only on the first $9,950 of income.

Next, they pay 12% only on the amount from $9,951 to $40,525. 

They keep paying the increasing rates on each portion, up to the top part from $83,000 to $83,350 that falls in the 22% bracket. 

So only that last slice of their total income gets the 22% rate. The rest is taxed at the lower bracket percentages.

Other Tax Considerations

The income ranges for each bracket adjust yearly for inflation. Higher incomes also face additional taxes like the Net Investment Income Tax and Medicare surtax. But the same principle applies across the board – you only pay each bracket’s rate on the amount in that income slice.

Knowing how tax brackets truly work allows you to estimate what you’ll owe based on your income. A proactive CPA can help you understand your tax liability before the end of the year and apply tax planning strategies to legally minimize taxes through deductions, credits, retirement plans, and more. 

The bottom line is tax brackets aren’t scary if you understand how they work. Armed with a little knowledge, you’ll be able to ask the right questions and make informed decisions. 

Tax Brackets 2023

Tax RateSingleMarried filing jointlyMarried filing separatelyHead of household
10%$0-$11,000$0-$22,000$0-$11,000$0-$15,700
12%$11,001-$44,725$22,001-$89,450$11,001-$44,725$15,701-$59,850
22%$44,726-$95,375$89,451-$190,750$44,726-$95,375$59,851-$95,350
24%$95,376-$182,100$190,751-$364,200$95,376-182,100$95,351-$182,100
32%$182,101-$231,250$364,201-$462,500$182,101-$231,250$182,101-$231,250
35%$231,251-$578,125$462,501-$693,750$231,251-$346,875$231,251-$578,100
37%$578,126 +$693,751 +$346,876 +$578,101+
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