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What is My Tax Bracket?

Updated for Tax Year 2016


OVERVIEW

The term "tax bracket" refers to the highest tax rate charged on your income. Under the federal income tax system, different rates apply to different portions of your income. So people in, say, the 25 percent tax bracket don't actually pay 25 percent of their income in taxes; rather, the last dollar they earn is taxed at 25 percent.


Progressive system, marginal rates

The federal income tax is progressive, meaning that tax rates increase as your taxable income goes up. As of publication, for example, income was taxed at seven rates: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 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.

what is my 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 percent: $0 to $20,000
  • 20 percent: $20,001 to $50,000
  • 30 percent: $50,001 and above

Now say your taxable income is $75,000, which puts you in the 30 percent bracket. The first $20,000 of that would be taxed at 10 percent, or $2,000. The next $30,000 would be taxed at 20 percent, or $6,000. The final $25,000 of your income is taxed at 30 percent, or $7,500. Your total tax: $15,500. Even though you're in the 30 percent bracket, you actually pay only about 20.7 percent 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, exemptions and deductions. For example, a married couple with two dependent children could reduce their taxable income by $28,800 in 2016 just by taking the personal exemptions and standard deduction to which all taxpayers are entitled, as of publication. This alone might be enough to drop the family into a lower tax bracket.

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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 2016 tax year, for a married couple filing a joint return, the 10 percent bracket applied to the first $18,550 in taxable income. The 15 percent bracket went up to $75,300. The 25 percent bracket went up to $151,900, and so on. The top rate, 39.6 percent, applied when taxable income topped $466,950. For single taxpayers, the thresholds were lower. The IRS announces the tax brackets for each year before that year begins.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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