Come tax season, you may ask yourself: how do tax brackets work? Tax brackets determine how much you as a taxpayer owe in income tax for a given tax year. Getting up to speed on this foundational piece of taxes means you can start forecasting how much you need to pay before you begin to file.
While figuring out your tax bracket may seem simple at first glance, you do have to be aware of certain factors before landing on the correct answer. There is also a very good reason to learn the nuances of tax brackets — it may even be possible for you to qualify for a lower tax bracket, which means you would owe less money in taxes. Ultimately, learning about tax brackets can help you understand how these designations will affect your finances come tax season and beyond.
What are tax brackets?
Tax brackets define cutoff ranges for taxable income as determined by the Internal Revenue Service (IRS). Income that falls within a certain range is taxed at the percentage designated for the tax bracket.
For instance, someone who has taxable income below a certain number will pay one tax rate; another person who has higher taxable income than that number will be subject to a different tax rate. Several different federal income tax brackets exist for different ranges of taxable income.
State income tax brackets may vary from state to state, as some may have different brackets, while others may apply a flat rate.
You should understand the two types of income tax rates when learning about tax brackets.
Marginal tax vs. effective tax rate
The two types of tax rates that come into play with tax brackets are the marginal tax rate and the effective tax rate.
The marginal tax rate is the tax rate you pay on every additional dollar of income. The higher the income level you’re in, the higher your marginal tax rate will be. Simply put, you will pay more in taxes as your income moves into a higher tax bracket.
In contrast, the effective tax rate is the actual percentage you pay on the total of your taxable income. This is the percentage of your annual income you’ll need to pay in taxes to the IRS.
Grasping these definitions and their differences well positions you to understand what your tax bracket is and how it determines your tax bill.
What’s my tax bracket?
Currently, seven tax brackets are divided along specific income cutoffs. These brackets may change year by year depending on changes to the tax code or changes in other legislation, so you may find yourself in a different tax bracket even if your income hasn’t changed. Or your income may change due to raises and adjustments, so you’ll want to make sure you’re on top of tax bracket changes each year regardless. Here is the income tax bracket for 2021:
|Rate||Single Filer||Married Filing Jointly||Married Filing Separately||Heads of Household|
|10%||$0 to $9,950||$0 to $19,900||$0 to $9,950||$0 to $14,200|
|12%||$9,951 to $40,525||$19,901 to $81,050||$9,951 to $40,525||$14,201 to $54,200|
|22%||$40,526 to $86,375||$81,051 to $172,750||$40,526 to $86,375||$54,201 to $86,350|
|24%||$86,376 to $164,925||$172,751 to $329,850||$86,376 to $164,925||$86,351 to $164,900|
|32%||$164,926 to $209,425||$329,851 to $418,850||$164,926 to $209,425||$164,901 to $209,400|
|35%||$209,426 to $523,600||$418,851 to $628,300||$209,426 to $314,150||$164,901 to $209,400|
|37%||$523,601 or more||$628,301 or more||$314,151 or more||$523,601 or more|
The United States uses a progressive tax rate for federal income tax, which means that you pay more in tax depending on how much you make. The rate also changes depending on how you file (e.g., jointly or separately with a spouse or as the head of household with qualifying dependents). You may owe more or less and may also fit into a higher or lower tax bracket depending on your filing status.
How to get into a lower tax bracket
Taxpayers in higher tax brackets will pay more to the IRS than those in lower tax brackets. As a result, taxpayers — especially those near a cutoff between brackets — may want to find ways to potentially lower their tax bill.
There are two main ways taxpayers can optimize their income to fall into lower tax credits: through tax credits and through tax deductions. Both can help you lower your bill (or increase your tax return) come tax time.
Taking advantage of tax credits and deductions can be a nuanced and challenging process. You can likely benefit from the help of financial experts, who are aware of the range of deductions and credits, as well as state and federal rules. It’s crucial to make sure you’re taking the best deductions for yourself and that you meet the qualifications necessary before submitting your return.
Finding professional help
Tax season can be stressful but having more information, including familiarity with tax brackets, can help alleviate some of your worries and help better position you to understand your financial situation. Knowledge of tax brackets can also help you figure out how to potentially get into a lower tax bracket through tax credits and deductions.
Taking full advantage of potential tax credits and deductions requires working with a financial professional who specializes in this area.
It can be a good idea to consider working with your tax preparer or financial advisor — or finding a professional if you don’t already have one — to find the best route to reduce your taxes.