Income tax brackets are slightly different from sports tournament brackets

Ccalculator, Pen, and Paper / 10 Percent? 25? 35? 39.6? How to Understand Your Income Tax Bracket
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February 28, 2017

Income tax is complicated.

Many people seek the help of professional tax preparers during tax season for just this reason. And federal income tax brackets are the basis of this complex system.

The Brackets

The rates for federal income taxes are divided into seven brackets based on taxpayer income. These brackets range from 10 percent to 39.6 percent.

So far, it doesn't seem so bad—but hold onto your hat, things are about to get complicated.

Income is taxed at more than one of 28 possible rates. There were seven federal income tax brackets in 2016: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent. And as if that weren't enough, there are four separate filing statuses:

  • Single—this status applies only to unmarried taxpayers
  • Married filing jointly—this one is for married couples who are combining their income on a single tax return
  • Married filing separately—this one applies to married couples who are each filing their own return
  • Head of household—this status is for individual taxpayers who are considered single for filing purposes, provide more than half of the support for a child, and are able to claim that child as an exemption

Seven tax brackets with different tax rates multiplied by four filing statuses = 28 possibilities.

But don't panic! Because you can file a return with only one status, you will not be subject to all of those possibilities. However, depending on your income, you might be taxed at up to seven different rates.

Breaking Down the Brackets

Much of the confusion surrounding taxes is a result of the terms used to talk about them.

Every tax bracket includes two amounts: a base amount and a ceiling amount. If your income falls anywhere between those two amounts, it is taxed at that bracket's rate.

The marginal tax rate is what people are talking about when they say which bracket they're in, e.g. the 15 percent tax bracket. A taxpayer's marginal tax is based on their "last dollar" of income. Whatever amount your income totals up to when everything is added up determines your marginal tax—your tax bracket.

Rate Single Married Jointly Married Separate Head of Household
10 % Up to $9,275 Up tp $18,550 Up to $9,275 Up to $13,250
15 % $9,276–$37,650 $18,551–$75,300 $9,276–$37,650 $13,251–$50,400
25 % $37,651–$91,150 $75,301–$151,900 $37,651–$75,950 $50,401–$130,150
28 % $91,151–$190,150 $151,901–$231,450 $75,951–$115,725 $130,151–$210,800
33 % $190,151–$413,350 $231,451–$413,350 $115,726–$206,675 $210,801–$413,350
35 % $413,351–$415,050 $413,351–$466,950 $206,676–$233,475 $413,351–$441,000
39.6 % More than $415,050 More than $466,950 More than $233,475 More than $441,000

Your effective tax rate is the actual tax rate you pay on all of your income. This will be lower than your marginal tax rate. Why?

How It Works

Your marginal tax rate—your tax bracket—is higher than your effective tax rate is because your income is taxed at different rates throughout the process. That's right, it's taxed at more than one rate along the way.

For example, let's say you're a single taxpayer earning $35,000 per year. The first $9,275 of that income will be taxed at 10 percent, while the remaining $25,725 will be taxed at 15 percent. Although $35,000 would fall into the 15 percent tax bracket, your effective tax rate is actually 13.7 percent.

The higher your income, the more tax brackets you go through to reach your effective tax rate.

Although it is good to know both your marginal and effective tax rates, these do not determine the final size of your tax bill. The actual amount of taxes you owe can only be determined by filling out a tax return, which takes into account all deductions, exemptions, and eligible credits. Nevertheless, a solid understanding of tax brackets provides a solid foundation for taxpayers to build on during tax time.

References: The Simple Dollar