The federal income tax system is progressive, which means that different tax rates apply to different portions of your taxable income. The term "tax bracket" refers to the highest tax rate applied to the top portion of your taxable income and depends on your filing status. Here's how to calculate your tax bracket.
Progressive system, marginal rates
For example, in 2020,
- Income was taxed at seven different rates:
- 10, 12, 22, 24, 32, 35 and 37 percent.
- These are marginal rates, meaning that each rate applies only to a specific slice of income, rather than to your total income.
- The rate that applies to the top slice of your income is your tax bracket.
A simplified example of brackets
For a simple example of how progressive taxation works, say the government has three marginal rates, set up like this:
- 10%: $0 to $20,000
- 20%: $20,001 to $50,000
- 30%: $50,001 and above
Now, let's say your taxable income is $75,000. This would put you in the 30% bracket.
- The first $20,000 of that would be taxed at 10%, or $2,000.
- The next $30,000 would be taxed at 20%, or $6,000.
- The final $25,000 of your income would be taxed at 30%, or $7,500.
- Your total tax would be: $2,000 + $6,000 + $7,500 = $15,500.
In this scenario, even though you're in the 30% bracket, you would actually pay only about 20.7% of your income in taxes.
Taxable income is what matters
Tax brackets apply only to your taxable income—that is, your total income minus all your adjustments and deductions.
For example, in 2020, let's say a married couple files jointly with a combined total income of $80,400. They take the 2020 standard deduction amount of $24,800 and each spouse takes a $5,500 IRA deduction.
- $5,500 + $5,500 + $24,800 = $35,800 deductions
- $80,800 total income - $35,800 deductions = $45,000 taxable income
These deductions could reduce their taxable income by $35,800 and help drop the family into a lower tax bracket.
Adjusting tax bracket parameters
Congress decides how many tax brackets there are and what the rates will be for each bracket. It's the Internal Revenue Service's job to adjust income thresholds to keep pace with inflation.
For example, in the 2020 tax year, for a married couple filing a joint return,
- The 10% bracket applied to the first $19,750 in taxable income.
- The 12% bracket went up to $80,250.
- The 22% bracket went up to $171,050, and so on.
- The top rate, 37%, applied when taxable income topped $622,050.
For single taxpayers, the thresholds were lower. The IRS announces the tax brackets for each year before that year begins.
Remember, when you use TurboTax to prepare your taxes, we’ll ask you simple questions and handle these calculations for you. We also offer a handy Tax Bracket Calculator to help you easily identify your tax bracket.