What is my tax bracket?

The federal income tax system is progressive, which means that tax rates go up as your taxable income increases. The term "tax bracket" refers to the ranges. To find out which tax bracket you are in, you need to look at the highest tax rate that applies to the highest portion of your taxable income based on your filing status. presentation.

• US. It uses 7 tax scales in 2022, ranging from 10% to 37%.

• The progressive tax system in the US. It means that lower income levels pay lower rates than higher incomes. 

• As you earn more money, your income may fall into higher tax brackets, causing different segments of your taxable income to be taxed at different rates.

• Your effective tax rate takes into account how much tax you pay on your overall income, providing a clearer picture of your federal income tax bill as a percentage of your taxable income.

What is a tax scale?

A tax bracket is a range of taxable income that is subject to a specific tax rate. The scales used to calculate your income taxes depend on your filing filing status. In 2021, there are seven tax brackets, each with a different tax rate, ranging from 10% to 37%.

 

TurboTax Note: There are seven tax rates for ordinary income: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These rates are marginal, that is, each rate applies only to a portion of the income, not the total.

How do the tax scales work?

A progressive tax system means that tax rates increase as your taxable income increases and your income falls into a higher tax bracket. Thus, you pay a higher tax rate on each successive portion of income.

Each portion of income (the income on a tax bracket) shows the percentage of tax you pay on that portion of your income. This means that whichever tax bracket you are in, the rate in that bracket will not apply to all of your income, unless your taxable income is in the lower bracket.

Tax Scale Example

For example, if you're single and have taxable income of $200,000 in 2021 , you're in the 32% "scale." However, you will not pay 32% on all of your taxable income.

You will pay taxes as follows:

• 10% on your taxable income up to $9,950, plus
• 12% on excess up to $40,525, plus
• 22% on taxable income between $40,525 and $86,375, plus
• 24% on the amount above $86,375 up to $164,925, plus
• 32% on the amount above $164,925 up to $200,000

In this case, even though you are on the 32% scale, you would actually only pay in taxes about 22.4% of your taxable income ($44,827/$200,000). Taxable income generally includes wages (including wages, bonuses, commissions, and tips) and other income such as taxable interest, pensions, IRA or 401(k) withdrawals, and short-term capital gains, among others. others. Taxable income can be complex, as the IRS classifies other types of earnings as such.

How does filing status affect my tax bracket?

The first step in preparing your income tax return is to determine your filing status. In general, you have five options:

1. single,
2. head of family ,
3. married filing jointly ,
4. married filing separately or
5. qualifying widow(er).

The filing status is very important, because it determines the amount of your standard deduction and the scales, and, therefore, the tax rate to which your income is subject. You can change your filing status each year, as long as you meet the specific requirements for doing so.

What is the marginal tax rate?

The marginal tax rate is the rate in the highest tax bracket to which you will be subject. It is the tax you pay on each additional dollar of your income and the rate by which each dollar of deduction reduces your taxes.

You don't pay your marginal tax rate on all your taxable income (unless your income is only in the lowest tax bracket). You pay the lowest tax rate, up to the lower bracket limit, then the next lower bracket rate, up to its cap, and so on until you reach all of your taxable income.

How do I calculate my marginal tax rate/tax bracket?

The easiest way to find out what your marginal tax rate is is to check the federal tax brackets and see which bracket your taxable income falls into. This represents your marginal tax rate. If you need help determining your tax bracket, visit TurboTax's tax bracket calculator . Simply indicate your filing status and your taxable income to calculate your tax bracket.

What is an effective tax rate?

While you'll likely pay income tax at various rates or in various tax brackets throughout the year, the actual percentage of your taxable income that the IRS receives is known as your effective tax rate. The last dollar of your taxable income is taxed at the highest marginal income tax rate, which is typically higher than your effective tax rate. For example, if half of your income is taxed at 10% and half at 12%, your effective tax rate of 11% means that $0.11 of every dollar of taxable income you earned this year goes to the IRS . This does not mean that every additional dollar of taxable income is taxed at 11%. Additional income is taxed at your marginal rate, 12% in this case.

Which is the most important, the effective or the marginal tax rate?

Generally, marginal rates are used to make decisions about what will happen if your income or deductions go up or down, while effective rates are used to figure out what percentage of your taxable income you are paying in taxes.

When analyzing the importance of these two tax rates, your situation will determine which is more important. If you're trying to determine the impact of a specific change on income, such as making a Roth conversion that's added to the rest of your income, your marginal tax rate will usually give you the answer.

If you're trying to determine how much of your income you should withhold for tax, your effective tax rate will generally give you a better answer than your marginal tax rate.

If the US tax system used a flat tax, the effective and marginal tax rates would be the same.

Ways to fall into a lower tax bracket

If you want to fall into a lower tax bracket, you have a couple of options to get there through lower taxable income. You may have lower taxable income if you have less taxable income, take advantage of more tax deductions, or a combination of both.

How do deductions affect your tax category?

Tax deductions reduce your taxable income by lowering the amount of income subject to tax. Deductions generally reduce your taxes based on your marginal tax rate multiplied by the value of the deduction. For example: If you have a tax deduction of $1,000 and you are entitled to the marginal tax rate of 22%, you will pay $220 less in tax. If you're at the lower end of a tax bracket, claiming a deduction may get you down a lower bracket.

How do tax credits affect your tax bracket?

Tax credits reduce your tax bill dollar for dollar, but do not affect your marginal tax rate. However, they do reduce your effective tax rate. You cannot go down the tax bracket by applying for a credit.

While you may have the goal of falling into a lower tax bracket, your main goal should be to keep your effective tax rate as low as possible. Deductions can help you fall into a lower tax bracket and have a lower effective tax rate, but tax credits will help you lower your effective tax rate further by lowering your tax bill dollar for dollar.

The type of income subject to tax matters

The tax brackets are based on the use of your taxable income to determine your federal income tax bill. However, not all income is treated the same for tax purposes. The income you earn from your job is taxed through the ordinary income tax brackets.

Long-term capital gains, on the other hand, are taxed at a rate of between 0% and 20%, depending on your level of income.

Regardless of the type of income you earn or the marginal tax rate that applies to you, your goal should be to keep your effective tax rate as low as possible.