Tax brackets seem simple enough – the more money you make, the more taxes you pay, there’s more to it than that, and it is important to understand why.
What are the Tax Brackets?
The tax brackets are simply broken down by income level. The exact bracket you’ll fall into depends on how you file your taxes. Are you single, married filing joint, married filing separate, or head of household? After determining how you file, you must determine your adjusted gross income – that’s your income after all deductions and credits. You then use that number to determine which tax bracket you fall into.
How Tax Brackets Are Used To Calculate Your Tax Liability
Here’s where the confusion lies. Many people mistakenly assume that if a pay raise causes them to cross over into a higher bracket, that higher rate applies to all their income. Fortunately, that isn’t the case – the higher rate only applies to the portion of your income that falls in that range.
Let’s say your taxable income (after deductions) is $39,000 and you are single. Your total income falls in range of the 22% tax bracket, or at least that’s how it looks, but in reality, only a portion of your income is subjected to the 22% rate. You pay the tax rate for each amount of income within the bracket. In this case, that means:
- $9,950 is taxed at 10% ($995)
- $29,300 is taxed at 12% ($3,606)
In this example, $4,601 of tax paid on $39,000 means the overall effective rate is 11.5%.
Now, let’s say you got a nice raise, and suddenly have $45,000 in taxable income (again, after deductions):
- $9,950 is taxed at 10% ($995)
- $30,575 is taxed at 12% ($3,669)
- $4,475 is taxed at 22% ($984)
The highest bracket rate of 22% is only applied to the income that falls into that bracket. In this example, $5,648 of tax paid on $45,000 in taxable income puts the effective rate at 12.6%, which is higher than the previous example, but not much.
2021 Tax Brackets
Below are the tax brackets for the year 2021:
Individuals
| Rate | Taxable Income In Range |
|---|---|
| 10% | $0 to $9,950 |
| 12% | $9,950 to $40,525 |
| 22% | $40,525 to $86,375 |
| 24% | $86,375 to $164,925 |
| 32% | $164,925 to $209,425 |
| 35% | $209,425 to $523,600 |
| 37% | $523,600 and up |
Married Filing Jointly
| Rate | Taxable Income In Range |
|---|---|
| 10% | $0 to $19,990 |
| 12% | $19,990 to $81,050 |
| 22% | $81,050 to $172,750 |
| 24% | $172,750 to $329,850 |
| 32% | $329,850 to $418,850 |
| 35% | $418,850 to $628,300 |
| 37% | $628,300 and up |
Head of Household
| Rate | Taxable Income In Range |
|---|---|
| 10% | $0 to $14,200 |
| 12% | $14,200 to $54,200 |
| 22% | $54,200 to $86,350 |
| 24% | $86,350 to $164,900 |
| 32% | $164,900 to $209,400 |
| 35% | $209,400 to $523,600 |
| 37% | $523,600 and up |
Your tax bracket affects how much money you owe in taxes at tax time. Remember that as your income rises, reaching a new bracket does not mean that your entire income will be subjected to the rate associated with the higher tax bracket. Fortunately, only a portion of your income total will be affected by the higher rate.