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Updated September 30, 2020

What is a Tax Bracket?

A tax bracket is range of incomes for which a certain tax rate applies.

Tax Bracket Example

The United States has a progressive tax system, which means that different portions of a person's income is taxed at increasing rates (often referred to as "marginal rates").

For example, the IRS 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% = $12,275.00
The final $18,350 is taxed at 28% = $5,138
Total tax owed: $21,894.25

Because this filer's highest taxable rate is 28%, we say that he or she is in the 28% tax bracket. note, however, that not ALL of the taxpayer's income is taxed at 28%. In fact, the taxpayer's actual total tax rate is $21,894.25/$100,000 = 21.89%.

The federal tax brackets change fairly often, but the highest tax bracket is usually around 35% of any income over about $375,000 (note that this excludes state taxes and FICA, which can add as much as 17%-18%).

You may have heard stories about people delaying income or even getting angry about additional income because it "kicks them up into a higher tax bracket." What they're saying is that the additional income will be taxed at a higher rate than the rest of their income. Once state and FICA taxes are added in, sometimes taxpayers have to pay more than half of this additional income in taxes if they're in the highest tax bracket and live in a high-tax state.

Why Tax Brackets Matter

In general discourse, it is important to understand the difference between tax brackets and tax rates. Many people assume that when they're in the 28% tax bracket, all of their income is being taxed at 28%, which is not correct. As our example shows, you can be in the 28% tax bracket but actually have a lower effective tax rate on your income.

In addition, tax deductions are important factors in determining in which tax bracket a taxpayer ends up, because deductions lower taxable income, and taxable income is what is actually taxed.

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