Confused by what percentage of your income goes to taxes and why it does not match the rate in the tax table? Here are the basics on how income tax rates work.
The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
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.
Progressive tax rates
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 2017 tax year, for example, single people with a taxable income of $9,325 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, 35, or 39.6 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.”
How tax brackets work
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 2017, 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 $9,325, then 15 percent on the excess up to $37,950, 25 percent on taxable income between $37,951 and $91,900, 28 percent on the amount over $91,900 up to $191,650, 33 percent on the amount over $191,650 up to $416,700, 35 percent on the amount over $416,700 up to $418,400, and 39.6 percent on the rest.
State income tax rates
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."
History of income tax rates
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 2017, the top rate is a more manageable 39.6 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.
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