Note: The content of this video applies only to taxes prepared for 2010. It is included here for reference only. Income tax rates change depending on both the amount of money you make and how you made it. Find out about income tax rates with help from TurboTax in this video on tax tips.
Hello, I'm Sara from TurboTax with important news on how the income tax rates work.
Most tax payers are confused as to how income tax rates actually affect the amount they pay. In the US, we use what is called the progressive system of income taxation. All this means is that the more money you make, the more tax you pay. But this does not mean that you pay just one rate on all your income.
Currently there are six tax brackets that range from 10 to 35 percent. Each bracket applies to specific portions of your income and do not overlap, and realistically, many tax payers have portions of their income taxed at all six rates. So, for example, if you are single and your taxable income is $40,000, the first $8,375 is taxed at 10 percent. The next $25,625 at 15 and the remaining $6,000 at 25 percent.
You may also hear people talk about marginal rates, but don't let this confuse you. It just refers to the highest tax brackets at which you are paying tax. For example, suppose half of your income is taxed at 10 percent and the other half is taxed at 15 percent. You could say your marginal rate of tax for the year is 15 percent.
Remember, though, you can't just look at your earnings and apply the tax rates. Our progressive system also allows you to claim deductions, exemptions and exclusions to calculate your taxable income. Only your taxable income determines which tax rates will apply. For more information about income taxes, visit TurboTax.com.