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What tax brackets are and how federal income tax rates work

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Demystifying your tax bill starts with understanding some basics on federal income tax rates — particularly, which tax bracket you're in.

A tax bracket is a range of incomes that is subject to specific tax rates set by the IRS. There are currently seven different federal tax brackets, and the one you fall into depends on your income and filing status.

The U.S. has what's known as a progressive tax system, which means that people with higher incomes pay higher federal income tax rates. However, the amount of tax you'll end up paying isn't dictated by the tax bracket where your income falls, but rather the rates leading up to and including that rate.

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Here's how tax brackets actually work

Video by David Fang

How tax brackets work

Each year, the government sets the tax brackets, and accompanying tax rates, which then determine how much tax you'll pay. For both the 2019 and 2020 tax years, the seven federal income tax brackets are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, the income ranges for each bracket have changed slightly.

Your income is divided up into various brackets and then each portion is taxed at the corresponding rate — meaning that you'll pay lower tax rates on a portion of your income up to the rate that corresponds with your income.

How does this work in real life? Consider someone who earned $55,000 in 2019 and is filing as a single person. This is how how the tax rates would break out:

  • Taxed 10% on the first $9,700, which equals $970
  • Taxed 12% on the next $29,775, which equals $3,573
  • Taxed 22% on the next $15,525, which equals $3,415.50

Added up, the total federal tax obligation for this worker comes to $7,958.50, which is about 15% of total income. That's because a majority of this individual's income is taxed at just 12%, rather than the 22% bracket where his or her income falls.

Similarly, a person making $110,000 would have a majority of his or her income taxed at a rate of 22%, rather than the 24% tax bracket where that income falls.

How income is taxed

$110,000

How a federal tax bill could break down for someone with a taxable income of $55,000 and $110,000.

$25,800

24%

$84,200

$44,725

22%

$55,000

$15,525

22%

$39,475

$29,775

12%

$29,775

12%

$9,700

$9,700

10%

$9,700

10%

Total tax bill: $7,960 (14.5% of income)

Total tax bill: $20,575 (18.7%)

Note: Brackets are for tax year 2019.

graphic: kiersten schmidt | grow Sources: irs, grow calculations

How income is taxed

$110,000

How a federal tax bill could break down for someone with a taxable income of $55,000 and $110,000.

$25,800

24%

$84,200

$44,725

22%

$55,000

$15,525

22%

$39,475

$29,775

12%

$29,775

12%

$9,700

$9,700

10%

$9,700

10%

Total tax bill: $7,960 (14.5% of income)

Total tax bill: $20,575 (18.7%)

Note: Brackets are for tax year 2019.

graphic: kiersten schmidt | grow Sources: irs, grow calculations

How income is taxed

How a federal tax bill could break down for someone with a taxable income of $55,000 and $110,000.

$110,000

$25,800

24%

$44,725

22%

$55,000

$15,525

22%

$29,775

12%

$29,775

12%

$9,700

10%

$9,700

10%

Total tax bill: $7,960 (14.5% of income)

Total tax bill: $20,575 (18.7%)

Note: Brackets are for tax year 2019.

Graphic: kiersten schmidt | grow

Sources: irs, grow calculations

How to reduce your federal tax bill

Figuring out what tax bracket your income puts you into can help you to understand what your tax obligations could be. And if your income has just pushed you over the threshold into a new tax bracket, tax deductions can reduce how much of your income is subject to taxes. Tax credits are even more valuable: They directly reduce the amount you owe in taxes.

Even if you're taking the standard deduction, there are several legal "loopholes" that can help you to save hundreds of dollars, or even thousands, on your tax bill. And you have until mid-April, when taxes are due, to reduce your tax bill by making a last-minute contribution to your IRA for the 2019 tax year.

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