What are Income Tax Rates?
An income tax rate is simply the percentage of your income that a government takes in taxes. In the United States, a single income tax rate doesn't usually apply to your entire income, but rather various rates will apply to different portions of your "taxable income" -- whatever is left over after you've claimed all the deductions and exemptions for which you are eligible. The number of different tax rates and the income levels at which they apply vary widely.
The federal government and most states use a system of "progressive" income tax rates. This means that as your taxable income increases, so does your maximum tax rate. In the 2012 tax year, for example, single people with a taxable income of $8,700 or less pay federal income tax at the tax rate of 10 percent. However, as taxable income increases, you are subject to tax rates of 15, 25, 28, 33 or 35 percent with the higher rates only applying to the higher portions of your income. People generally refer to the range of taxable income for each tax rate as a “tax bracket.”
Progressive tax rates are "marginal," meaning that each rate applies to specific portions of your taxable income within a specified range, or tax bracket. For example, if you are single and have taxable income of $200,000 in 2012, then you are in the 33 percent "bracket."
However, you will not pay 33 percent on all taxable income. Instead, you pay 10 percent on everything up to $8,700, then 15 percent on the excess up to $35,350, 25 percent on taxable income between $35,3501 and $85,650, 28 percent on the amount over $85,650 up to $178,650, 33 percent on the amount over $178,650 up to $388,350 and 35 percent on the rest.
Although a majority of states impose income taxes in the same way the federal government does, some apply a single income tax rate to everyone, regardless of the amount of taxable income you earn. This is called a "flat tax."
Tax rates rise and fall all the time. In 1913, right after the 16th Amendment to the Constitution legalized a direct tax on individual incomes, the marginal federal rates ranged from 1 to 7 percent. To pay for massive military spending during World War II, the top tax rate rose as high as 94 percent in 1945. The top rate remained above 90 percent until the 1960s when it dropped to 70 percent. However, as of 2012, the top rate is a more manageable 35 percent. The number of tax brackets has varied significantly as well. In 1918 there were 56; whereas, in the late 1980s there were only two.