Everyone who earns an income in the United States is required to pay federal income taxes. This money is used by the federal government to pay for such necessities as defense, housing, education, science, and interest on the national debt. Each person who pays these taxes is put into tax brackets, something you have probably heard about. While most people have heard the term tax bracket, they still do not know exactly what that means. Here is a little guide to help you better understand what a tax bracket is and help you find yours.

The Progressive Tax System

The United States uses what is known as a progressive tax system. This means that specific portions of your taxes are taxed at different rates as your income climbs higher. The point of this system is to ensure that all taxpayers will pay the same rates on the same levels so that those that have a higher taxed income will pay higher income taxes. Rather than taxing everyone the same amount, everyone earning an income is taxed at a certain percentage of their income.

What Are Tax Brackets?

Tax brackets are a visual representation that show taxpayers how much they are required to pay at various income levels. Most taxpayers pay income taxes at various rates, or tax brackets, on their taxable income. Each taxpayer can fall into one of a possible 28 different tax brackets and can be taxed at seven different rates depending on their income. The seven brackets range from 10 percent to 39.6 percent and are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent. For each tax bracket, there is a base amount and a ceiling amount. If your annual income falls within the base amount and ceiling amount of a specific bracket, that is the bracket you fall into.

Marginal Tax Rate vs. Effective Tax Rate

There are two different tax rate percentages that you will see when looking at your taxes; the marginal tax rate and the effective tax rate. When people are referring to which tax bracket that are in, they often confuse these two tax rates. The marginal tax rate is the amount of tax paid on any income in addition to your base salary. For example, if you get a raise, the portion of the raise that increased your income beyond what you previously had is under the marginal tax rate. The effective tax rate is the amount that you owe in taxes divided by the taxable income. This number is the percentage of your income that you will pay in taxes.

The 5 Categories of Filing Status

When you file your tax returns, you will have to file as one of five filing statuses; single, married filing jointly, married filing separately, head of household, and qualifying widower with a dependent child. What status you file under will have a pretty significant impact on which tax bracket you fall under. The five categories that you will file under are:

Single – Those who are unmarried.

Married filing jointly – Married couples that are combining their income on one single tax return.

Married filing separately – Married couples that each will file their own income tax return.

Head of Household – Those who file as single but provide more than half of support for a child and are able to claim said child as an exemption.

There are two ways that your filing status can impact the amount of taxes that you will pay; deductions and tax bracket. While some people may itemize their deductions and individually list and calculate them, most people claim the standard deduction, which is determined by your filing status. Filing statuses also have an impact on which tax bracket, and therefore tax rate, that you will fall into.

When you file your federal income taxes, you will fall into one or multiple of 28 potential tax brackets. Whichever bracket you fall into will determine your tax rate and how much tax you will end up paying. Understanding tax brackets will help you better understand what your tax rate is and why. If you are looking to plan your income taxation, come to France Law Firm.