Federal Income Tax
What it is:
How it works/Example:
The United States has a progressive tax system, which means that different portions of a person's or company's income are taxed at increasing rates (that's why the rates are often referred to as marginal tax rates). For example, the might tax a single filer's $100,000 income as follows:
The first $8,025 is taxed at 10% = $802.50
The next $24,525 is taxed at 15% = $3,678.75
The next $49,100 is taxed at 25% = $12,275
The next and final $18,350 is taxed at 28% = $5,138
Total tax owed: $21,894.25
The highest federal tax bracket changes often, but it is usually around 35% of any income over about $375,000 (note that this excludes state taxes and social security/Medicare, which can add as much as another 17% to 18% in taxes, for a total of as much as 53% in taxes on additional income).
Why it matters:
In general discourse, it is important to know the difference between federal tax brackets and federal tax rates. Many people assume that when they're in the 28% , for example, that all of their income is taxed at 28%, which is not the case. As our example shows, you can be in the 28% federal but actually have a 21.89% effective tax rate on your income. It is also important to note that states may impose their own income on taxpayers, which be over and above the federal income tax.