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By Numbers Blog

Tax Brackets and How They Work

In order to understand how tax brackets work, you must first know what they are and how they differ from tax rates. A tax bracket is essentially a specific range of income that is taxed at a certain rate. The United States uses a progressive taxation system, which means that as your income rises, the rate at which you are taxed will also increase, up to a certain point.

However, every income falls into specific tax brackets, and there are seven brackets in total. The U.S. tax rates range from 10% to 37%. This range also has separate dollar brackets for single filers, married or joint filers, separated filers, and head of household filers. The low-income proprietors fall into those tax brackets with a low-income tax rate, whereas those who earn higher incomes fall into the tax brackets that will charge a higher income tax rate.

Knowing how tax brackets work is essential for every adult. We need to be aware of how much of our income will go towards taxes so we can be mindful of our budgeting. Below, we take a look at how tax brackets work and some of the specific income tax rates for different incomes.

HOW IS MY INCOME TAXED?

If we try to understand how tax brackets work, we need to look at some numbers. For example, if you're a single filer and have an annual income of less than $9,700, you will be subject to a 10% tax rate. This is the minimum bracket.

However, if you earn more than $9,700, you will be taxed at 10% for the first bracket, which has a cut off till $9,700, and at 12% for the remaining amount, ranging from $9,700 to $39,475. This latter is the second bracket.

So, there is a clear difference between your marginal tax rate and your effective tax rate. Let's do some calculations to make it easier for you:

  • Imagine you have an annual income of $50,000.
  • In this case, you are taxed 10% for the first bracket ($9,700), which takes your tax total to $970.
  • Then you will be taxed 12% for the amount that ranges between $9,700 and $39,475, which is $29,775. 12% of this amount is $3,573.
  • Finally, the remaining amount between $39,475 and $50,000 will be taxed 22%. So, 22% of $10,525 is $2,315.
  • Thus, the total tax you pay is $6,858.

Now, this total amount is roughly 13% of your total income, which is $50,000. So, in reality, you're technically not paying 22% of the entire income. You're only paying 13% of the $50,000.

The total amount you pay, through each tax bracket, is the effective tax rate. This is only possible because of the tax bracket system. So, your marginal tax rate (the tax you pay on your top bracket) is 22%. However, your tax liability (the effective tax rate) is listed at 13%.

TAX RATES

The above example showed how the tax bracket works for a single filer. However, there are differences in tax rates for couples, separated people, and people who have a dependent, like a child.

Several tax benefits come about in these scenarios. Different types of filers also have a different range of income that is taxed. Below are the different tax rates to varying incomes for different filers:

SINGLE FILERS

  • $0 to $9,700 - 10% of this income bracket is taxed.
  • $9,700 to $39,475 - 12% of this income bracket is taxed. ($970 along with 12% of the remainder over $9,700)
  • $39,476 to $84,200 - 22% of this income bracket is taxed. ($4,543 along with 22% of the remainder over $39,475)
  • $84,201 to $160,725 - 24% of this income bracket is taxed. ($14,382.50 along with 24% of the remainder over $84,200)
  • $160,726 to $204,100 - 32% of this income bracket is taxed. ($32,748.50 along with 32% of the remainder over $160,725)
  • $204,101 to $510,300 - 35% of this income bracket is taxed. ($46,638.50 along with 35% of the remainder over $204,100)
  • $510,300 and over - 37% of this income bracket is taxed. ($153,798.50 along with 37% of the remainder over $510,300)

MARRIED/JOINT FILERS

  • $0 to $19,400 - 10% of this income bracket is taxed.
  • $19,401 to $78,950 - 12% of this income bracket is taxed. ($1,940 along with 12% of the remainder over $19,400)
  • $78,951 to $168,400 - 22% of this income bracket is taxed. ($9,086 along with 22% of the remainder over $78,950)
  • $168,401 to $321,450 - 24% of this income bracket is taxed. ($28,765 along with 24% of the remainder over $168,400)
  • $321,451 to $408,200 - 32% of this income bracket is taxed. ($65,497 along with 32% of the remainder over $321,450)
  • $408,201 to $612,350 - 35% of this income bracket is taxed. ($93,257 along with 35% of the remainder over $408,200)
  • $612,350 and over - 37% of this income bracket is taxed. ($164,709.50 along with 37% of the remainder over $612,350)

If you do not fall under these two categories of tax filers, you can go to the several online resources provided by the Internal Revenue Services (IRS) to find out precisely what you have to pay in taxes, special considerations for your tax liability, and what type of tax filer you are. There is also information on potential tax savings available to tax filers of all kinds.

CONCLUSION

It is extremely important to know what tax bracket you're in to anticipate your Tax Burden. As you can see above, there is a significant chunk of money that you can save if you file your taxes as a couple.

Similarly, there are many other savings that you can take advantage of if you know how much tax you have to pay each year. You may be surprised at how little you might owe in taxes. Overwhelming? You aren’t the only one, let the team at Hall Accounting Company know and we will set up a time to discuss. Please reach out to Josh Hall at Josh.Hall@HallAcctCo.com or Jeremy Hall at Jeremy.Hall@HallAcctCo.Com for more information. From tax filing strategies to tips on bookkeeping and accounting, we’ve got you covered.

FUTURE IMPORTANT DEADLINES

02/01/21
Deadline for employers to mail out W-2 Forms to their employees and for businesses to furnish 1099 Forms reporting non-employee compensation, bank interest, dividends, and distributions from a retirement plan

03/01/21
Deadline for businesses to mail Forms 1099 and 1096 to the IRS

03/15/21
Deadline for S-Corporate tax returns (Form 1120-S) for tax year 2020, or to request an automatic six-month extension of time to file (Form 7004) for S-Corporations that use the calendar year as their tax year, and for filing Partnership tax returns (Form 1065) or to request an automatic six-month extension of time to file (Form 7004)

03/31/21
Deadline for businesses to e-file Forms 1099 and 1096 to the IRS, except Form 1099-NEC

04/15/21
Deadline to file individual tax returns (Form 1040) for the tax year 2020 or to request an automatic extension (Form 4868) for an extra six months to file your return, and for payment of any tax due, and for Deadline for corporate tax returns (Forms 1120 and 1120-A) for tax year 2020, or to request an automatic six-month extension of time to file (Form 7004) for corporations that use the calendar year as their tax year

04/15/21
Deadline for household employers who paid $2,200 or more in wages in 2020 to file Schedule H for Form 1040

04/15/21
Deadline for first-quarter estimated tax payments for the 2021 tax year

06/15/21
Deadline for second-quarter estimated tax payments for the 2021 tax year

09/15/21
Deadline for third-quarter estimated tax payments for the 2021 tax year

09/15/21
Deadline for S-Corporate tax returns (Form 1120-S) for tax year 2020 for S-Corporations that use the calendar year as their tax year, and for filing Partnership tax returns (Form 1065)

10/15/21
Final extended deadline to file individual tax returns for the year 2020 (Form 1040), and for Deadline for corporate tax returns (Forms 1120 and 1120-A) for tax year 2020 for corporations that use the calendar year as their tax year