What Are Tax Brackets?

Are you confused about your tax brackets?  Are you unsure what tax brackets are?  Or, are you struggling to understand how they affect the tax you pay?

If so, this guide will help you.  Here, we look at everything you need to know to answer the question ‘what are tax brackets?’  Keep reading to learn more.

Introduction to tax brackets

Like many other countries, the United States uses a progressive tax system.  This means that different portions of your income are taxed at different rates.  In general terms, you’ll pay a higher overall tax rate if your income is higher.

Each income tax bracket means you pay a different tax rate on that portion of your income.

Tax brackets are the physical representation of this system and they show you how much you have to pay at different income levels.  For example, in 2011 and if you are single the lowest tax rate of 10% is applied to the first $8,500 of your income.  The next portion of your income is then taxed at 15%, and so on, up to the top of your taxable income.

The current tax brackets

Tax brackets and tax rates regularly change.  So, you should always check to see if you are using accurate tables when you file your taxes.

The tax brackets in 2011 depend on your filing status as follows:

Tax rate Single Head of Household Married Filing Jointly or Surviving Spouse Married Filing Separately
10% Up to $8,500 Up to $12,150 Up to $17,000 Up to $8,500
15% $8,501 to $34,500 $12,151 to $46,250 $17,001 to $69,000 $8,501 to $34,500
25% $34,501 to $83,600 $46,251 to $119,400 $69,001 to $139,350 $34,501 to $69,675
28% $83,601 to $174,400 $119,401 to $193,350 $139,351 to $212,300 $69,676 to $106,150
33% $174,401    to $379,150 $193,351 to $379,150 $212,301 to $379,150 $105,151 to $189,575 
35% $379,151 or more $379,151 or more $379,151 or more $189,576 or more


Your ‘effective’ tax rate

The chances are that you will pay different tax rates on different parts of your income.  For example, if you have a taxable income of $100,000 you’ll pay four different rates of tax on different parts of your income.

The actual percentage of your income that goes to the IRS is often referred to as your ‘effective’ tax rate.  What you’ll therefore find is that the rate you pay on the last dollar you earn is usually much higher than your effective tax rate.

For example, if half of your income is taxed at 10 per cent and the other half at 15 per cent, your effective tax rate is 12.5 per cent.  This means that 12.5 cents of every dollar you earned this year goes to the IRS, although your ‘marginal’ tax rate (the rate paid on the last dollar of income you earn) is higher (at 15%).

Remember that any taxes that you pay are based on your taxable income.  This is your adjusted income after you have taken deductions and adjustments into account.

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