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Understanding Tax Brackets: A Comprehensive Guide
Most of us have heard of tax brackets, but not everyone understands what they are or how they work. Tax brackets are income ranges that help determine the tax rates you pay on your federal income tax return. The IRS uses a system that taxes the lowest portion of your income at the lowest rate and the remainder at progressively higher rates. Understanding this system can help you better grasp how your tax bill is calculated and how federal income taxes work. Here’s what you need to know about tax brackets.
How Do Tax Brackets Work?
Tax brackets are part of a tiered system of tax rates—officially known as marginal tax rates—used to calculate your federal income taxes. You pay the lowest marginal tax rate on your lowest tier of income and progressively higher rates as your income increases. Each income tier is known as a tax bracket.
To calculate or estimate your taxes, you need these four key pieces of information:
- Taxable income: Your total income minus standard or itemized deductions
- Filing status: Includes unmarried, head of household, married filing separately, or married filing jointly
- Marginal tax rates: The percentages used to calculate what you owe in taxes
- Tax brackets: The ranges of income that match up with each marginal tax rate
How Many Tax Brackets Are There?
There are seven different tax brackets defined by income level, each with its own tax rate: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Although the tax rates haven’t changed since they were revised under the Tax Cuts and Jobs Act of 2017, the income levels that define each tax bracket are adjusted annually for inflation.
Federal Tax Brackets for 2023
Here are the marginal tax rates and tax brackets used to calculate your federal income taxes for the 2023 tax year:
| Tax Rate | Single | Head of Household | Married Filing Separately | Married Filing Jointly |
|---|---|---|---|---|
| 10% | Up to $11,000 | Up to $15,700 | Up to $11,000 | Up to $22,000 |
| 12% | $11,001 to $44,725 | $15,701 to $59,850 | $11,001 to $44,725 | $22,001 to $89,450 |
| 22% | $44,726 to $95,375 | $59,851 to $95,350 | $44,726 to $95,375 | $89,451 to $190,750 |
| 24% | $95,376 to $182,100 | $95,351 to $182,100 | $95,376 to $182,100 | $190,751 to $364,200 |
| 32% | $182,101 to $231,250 | $182,101 to $231,250 | $182,101 to $231,250 | $364,201 to $462,500 |
| 35% | $231,251 to $578,125 | $231,251 to $578,100 | $231,251 to $346,875 | $462,501 to $693,750 |
| 37% | Over $578,125 | Over $578,100 | Over $346,875 | Over $693,750 |
Federal Tax Brackets for 2024
For the 2024 tax year, tax brackets are adjusted for inflation. Because of these adjustments, you might pay slightly lower taxes on the same income in 2024 compared to 2023.
| Tax Rate | Single | Head of Household | Married Filing Separately | Married Filing Jointly |
|---|---|---|---|---|
| 10% | Up to $11,600 | Up to $16,550 | Up to $11,600 | Up to $23,200 |
| 12% | $11,601 to $47,150 | $16,551 to $63,100 | $11,601 to $47,150 | $23,201 to $94,300 |
| 22% | $47,151 to $100,525 | $63,101 to $100,500 | $47,151 to $100,525 | $94,301 to $201,050 |
| 24% | $100,526 to $191,950 | $100,501 to $191,950 | $100,526 to $191,950 | $201,051 to $383,900 |
| 32% | $191,951 to $243,725 | $191,951 to $243,700 | $191,951 to $243,725 | $383,901 to $487,450 |
| 35% | $243,726 to $609,350 | $243,701 to $609,350 | $243,726 to $365,600 | $487,451 to $731,200 |
| 37% | Over $609,350 | Over $609,350 | Over $365,600 | Over $731,200 |
Tax Brackets Example
Visualizing how tax brackets and marginal rates work together might be easier if you plug some numbers into the formula. Using 2023 tax brackets, here’s how you might calculate your tax bill if you’re a single taxpayer with $60,000 in taxable income.
| Income | Tax Rate | Taxes Owed |
|---|---|---|
| Bracket 1 (up to $11,000) | 10% | 10% x $11,000 = $1,100 |
| Bracket 2 ($11,001 to $47,150) | 12% | 12% x $36,149 = $4,338 |
| Bracket 3 ($47,151 to $100,525) | 22% | 22% x $12,849 = $2,827 |
| Total Tax Bill | $8,265 |
In this example, you’re in the 22% tax bracket. But, as you can see, even if some of your income is taxed at 22%, your tax bill does not equal 22% of your total taxable income. Because the first bracket is taxed at 10% and the second one at 12%, in our example your total tax bill has an effective tax rate of just under 13.5%.
If you receive a bonus or other additional income, you’ll pay taxes on that money at your top marginal rate (in this example, 22%). Also, if your income outgrows your current bracket, you’ll move into the next tax bracket and pay a higher rate on those additional dollars.
How to Find Your Tax Bracket
To find your tax bracket, start by calculating your taxable income. For a quick estimate, add up your income for the year, including wages, interest, capital gains, business income, IRA distributions, and so on, and subtract your standard or itemized deductions. Or, if your income is fairly consistent year to year, use this shortcut: Find last year’s taxable income on line 15 of your most recent tax return (Form 1040) and use it as a ballpark.
Check the income ranges shown on the 2023 or 2024 tax bracket table and locate the range that includes your income. For example, in 2023, if you’re married filing jointly and your combined taxable income is $240,000, your tax bracket is 24% (between $201,051 and $383,900).
The Bottom Line
Knowing how tax brackets work is key to understanding how your income is taxed. Your top marginal tax rate, or what people commonly refer to as their tax bracket, is not the same thing as your effective tax rate. Being in the 24% bracket doesn’t mean you’re paying 24% of your taxable income in taxes. Instead, your income is taxed progressively through a series of marginal tax rates, up to 24%.
Your top marginal rate can be helpful for estimating how much tax you’ll owe on any additional income you make: bonuses, capital gains, lottery winnings, and so on. If you really do win the lottery (or score another large windfall), be aware that your additional income may kick you into a higher tax bracket. You’ll still be taxed according to the same progressive system of rates and brackets; you’ll just top out in a higher bracket.
For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you navigate your financial journey with ease and expertise.
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