What you need to know About Tax brackets
Tax brackets are one of the most misunderstood parts of the tax system. Many people believe that earning more money means all of their income is taxed at a higher rate. That is not how tax brackets work.
The U.S. tax system uses a progressive structure, meaning different portions of your income are taxed at different rates. Understanding this can help you better understand how your tax bill is calculated.
What Is a Tax Bracket?
A tax bracket is a range of income that is taxed at a specific percentage. As your income increases, it moves through multiple brackets. Only the income within each bracket is taxed at that bracket’s rate.
Example of Tax Brackets
Below is a simplified example of how federal tax brackets are structured. Actual brackets vary by tax year and filing status.
| Income Range | Tax Rate |
|---|---|
| $0 – $11,000 | 10% |
| $11,001 – $44,725 | 12% |
| $44,726 – $95,375 | 22% |
| Over $95,375 | 24% and higher |
How Income Is Actually Taxed
If your taxable income is $50,000, it is not all taxed at 22%. Each portion of your income is taxed at the rate for the bracket it falls into.
| Portion of Income | Tax Rate | Tax Owed |
|---|---|---|
| First $11,000 | 10% | $1,100 |
| Next $33,725 | 12% | $4,047 |
| Remaining $5,275 | 22% | $1,161 |
| Total Tax Owed | $6,308 | |
Marginal vs. Effective Tax Rate
Your marginal tax rate is the highest tax bracket your income reaches. Your effective tax rate is your average rate across all income.
| Marginal Tax Rate | 22% |
| Effective Tax Rate | 12.6% |
Understanding the Different Filing Statuses
Your filing status determines how your tax brackets are applied, your standard deduction amount, and which credits you may qualify for. Choosing the correct filing status is important, as it directly affects how much tax you owe or the amount of your refund.
Single
You generally file as Single if you are unmarried, divorced, or legally separated as of December 31 and do not qualify for another filing status.
Married Filing Jointly
Married Filing Jointly allows spouses to combine income on one return and often provides the largest standard deduction and more favorable tax brackets.
Married Filing Separately
Married Filing Separately may be used in certain situations, but it often limits credits and deductions and can result in a higher overall tax bill.
Head of Household
Head of Household status is available to unmarried taxpayers who support a qualifying dependent and pay more than half the cost of maintaining a home. It offers better brackets than Single status.
Qualifying Surviving Spouse
This status allows eligible taxpayers to use the same tax brackets and standard deduction as Married Filing Jointly for a limited time after the death of a spouse.
Puma Accounting Tax Pros
Want you to uderstandg tax brackets and filing status helps clear up common misconceptions and makes tax time less stressful. While examples are helpful, everyone’s tax situation is different.
Book an appointment with us today and let us make tax season easier for you.
