Tax Brackets

What’s exactly is an Income Tax Bracket?

In the United States, we use a system that charges a different tax rate depending on your income. As your income increases, so does your tax rate. These different rates are called tax brackets.

One of the common misconceptions is that if your income is high enough to push you into a higher tax bracket, you owe a higher tax rate on every single dollar that you have made that year. However, that isn’t how our system works. Instead, you only pay that higher rate for each additional dollar that you earn above a certain amount. The way to you find out how much you owe based on your income is to find your current income on the IRS tax bracket chart, and use the income and tax rates in the chart.

For example, if you get bumped up from the 12% to the 22% tax bracket because you are making $60,000, you don’t owe $13,200 in taxes (60,000*0.22).

How to do it the old-fashioned way

(you can skip to the next section if you care less about the journey than the destination)

To find out how much you owe in income taxes, you add:

• 10% on any income up to $14,650 (a maximum of $1,465, which is found by 14,650*0.1)
• 12% on any income between $14,650 and $55,900 (a maximum of $4,950 which you find by subtracting the $14,650 that you already paid 10% taxes on from the $55,900 upper limit to find the amount that you haven’t paid taxes on yet, and then multiplying that 41,250 by the 12% tax rate to get 4,950)
• 22% on any income between $55,900 and $89,050 (you subtract 55,900 from your 60,000 income and get 4,100. You then multiply that 4,100 by 22% to get 902 because that is the amount of your income that is above 55,900 and that you haven’t paid taxes on yet).

With all of this information, you can then add up the 1,465 from the first bracket, 4,950 from the second bracket, and the 902 from the third bracket to get $7,317 that you owe in taxes.

How to do it the easy way

As you can see from the chart (which I added in a second time so that you don’t have to scroll back and forth), the IRS does the math for you on how much you owe for the lower tax brackets, so you can use the formula provided on the chart. You find your tax bracket, subtract the lower limit of your bracket from your income, (60,000 salary – 55,900 bracket limit) and then multiply that amount by the tax rate for that bracket (22% in this case) to get $902. You then add the stated total from the lower brackets (in this case, $6,415) and add it to the $902 and get your income tax total of $7,317. As you can see, this is much lower than if you had to pay 22% of every dollar that you made!

How to do it the easiest way

Many websites offer calculators for finding your income tax bill. Just be careful about which year they are designed for because income tax brackets are constantly changing!