How US Tax Brackets Work
Oh, the illustrious tax bracket. The place that determines how much money you have to pay Uncle Sam during tax season. Unlike March Madness, there are no real winners in this bracket. And like my current relationship status — it’s complicated.
Today, taxes are one of the most highly talked about political platforms. It riles up the population like rabid squirrels and creates many debates. However, there are many misunderstandings about how tax brackets actually work in the US.
So in this article, we will shine a light on the illustrious brackets and give you the insight you need to have a passionate and informed conversation with your drunken uncle on Thanksgiving.
What Are Tax Brackets
US tax brackets are the cutoff values for taxable income. It separates your income into different pockets and taxes that money accordingly. Federal, state, and city taxes are progressive — where the lowest bracket pays the lowest amount, and the highest bracket pays the highest.
Right now, the United States has seven different tax brackets ranging from 10% to 37%. The tax brackets are also separated into Single, Married Joint Returns, and Head of Household.
When you determine which tax brackets you fall under, you should first calculate your taxable income minus your adjustments and deductions — an item you can subtract from your income.
It is true that lower incomes fall into lower tax brackets and higher incomes fall into higher brackets; however, what many people do not realize is that people are taxed at different rates when their income falls into different marginal brackets.
For example, let’s say you are single and make $60,000 a year. Many people think you would have to pay 22% of your income. This is not true. First, you are able to subtract your available deductions. In this case, it would be $13,200. So now you have $47,800 of taxable income.
Then that amount is taxed at different rates. So your money up to $9,525 is taxed at 10%. Then your money up to $38,700 is taxed at 12%, and finally, your money up to $47,800 is taxed at 22%. So, in the end, you only are taxed 10.74% instead of it all being 22%.
Once you get to know the marginal tax bracket system, you realize that people are not being taxed the entire amount that many politicians spout out in fiery debates. In actuality, our taxes are ALOT lower than the rest of the world. However, with these lower taxes, we do not offer the free healthcare, higher education, and unemployment benefits that many other places provide.
Hopefully, this article has made tax brackets seem a lot cooler and more interesting than a date at TGI Friday’s with Gerald, who works at the IRS.
In the end, the more you know about taxes and how the system works will give you the insight and education needed to be your best financial self.