What Most People Don't Understand About Tax Brackets

by Lavish Green Staff

December 5, 2019

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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:

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):

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.

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