What Is a Tax Bracket?

A tax bracket is a range of taxable income that is subject to a specific income tax rate. In the U.S., federal income taxes generally use a progressive tax system, meaning different portions of taxable income can be taxed at different rates as income increases.

A common misconception is that moving into a higher tax bracket means all of your income is taxed at the higher rate. In reality, marginal tax rates apply only to the portion of taxable income that falls within each bracket.

How Do Tax Brackets Work?

Consider a simplified example with three tax brackets:

10% on the first $20,000 of taxable income

20% on income from $20,001 to $50,000

30% on income above $50,000

If a taxpayer has $60,000 of taxable income, the entire $60,000 is not taxed at 30%. Each portion is taxed according to the applicable bracket. This creates a marginal tax rate, while the total tax paid as a percentage of taxable income represents the taxpayer’s effective tax rate.

Suppose the taxpayer has 60,000 of taxable income. Even if 60,000 is not taxed at 30%, the amount of 60,000 is still taxed at their relevant brackets, respectively.

That’s why the marginal rate of tax is 30%, but the overall percentage of tax over the taxable income is the effective rate of tax. Comparison of the actual federal tax brackets in the United States (US) based on filing status and the year of taxation.

US Tax Rates Over Time 

US tax rates over time have varied widely through the course of time, as changes have been made to the tax codes, economy and government policy. Federal tax brackets and income test levels can be modified from time to time.

The number of brackets and the rates that apply to them can be altered after substantial changes have been made to the tax code. So, taxpayers and businesses should refer to the tax brackets for the particular tax year when planning or preparing a tax return.

What Can Affect Your Tax Liability?

Your overall tax liability may depend on more than your tax bracket. Factors can include:

• Taxable income
• Filing status
• Deductions
• Tax credits
• Investment income
• Retirement contributions
• Applicable federal and state taxes

Understanding tax brackets can help individuals and businesses make better-informed financial and tax planning decisions.

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