How Tax Brackets Work

Tax Bracket History

Colonial and early U.S. taxes went through various changes until the first income tax was established by the Revenue Act of 1861. The purpose of this income tax was to help the Union raise money to fight the Civil War against the Confederacy. This income tax affected incomes of $800 and up at a rate of 3 percent.

The first tax brackets came about in 1862. The lower tax bracket was 3 percent for income up to $10,000; the higher tax bracket was 5 percent for income over $10,000. In 1872, this income tax was repealed. Since the Civil War ended, the government no longer needed the money.

The U.S. Constitution gave the federal government the power to levy taxes "in proportion to each State's population" [source: U.S. Department of the Treasury]. When the federal government established an income tax in the 1890s, the Supreme Court declared the tax unconstitutional, because it disregarded state populations.

In 1913, the 16th Amendment to the Constitution gave the government the power to levy an income tax regardless of state population. The federal income tax has been in place ever since.

Here are some important dates in the history of the federal income tax and its tax brackets.

1913: Tax brackets range from 1 percent on income of $0-$20,000 to 7 percent on income of $500,000 and higher.
1916: Revenue Act increases rates. Tax brackets range from 2 percent to 15 percent.
1917: War Revenue Act of 1917 increases rates. Tax brackets range from 2 percent on income of $0-$2,000 to 67 percent on income of $2 million and higher.
1920s: Tax rates are cut because the economy is doing well. The highest marginal rate decreases to 25 percent.
1930s: Big increases because of the Great Depression. Lowest rate is 4 percent. Highest rate is 79 percent. Income of $90,000-$100,000 is taxed at 59 percent. In 1933, there are 55 tax brackets, mostly in 1 percent increments.
World War II: Great tax increases to fund the war. The lowest rate in 1944 is 23 percent, for income of $2,000 or less. The highest rate is 94 percent for income of $200,000 or more.
1981: Economic Recovery Tax Cut of 1981 lowers tax rates. Highest tax rate drops from 70 percent to 50 percent.
1986: Tax Reform Act of 1986 reduces rates further and cuts the number of brackets. For the 1986 tax year there are 15 tax brackets. For 1987, there are five [source: The Tax Foundation].
2013: American Taxpayer Relief Act of 2012 increases the highest income tax rate to 39.6 percent and also establishes seven tax brackets.
2017: The Tax Cuts and Jobs Act kept seven tax brackets but lowered the rates for five of them. The highest tax rate is also lowered to 37 percent. It becomes effective in 2018.

If you'd like to know more about tax brackets and related topics, you can follow the links below.

Tax Brackets FAQ

What are the tax brackets for 2020?

There are seven tax brackets for 2020: 10 percent for incomes over $9,875 or less 12 percent for incomes over $9,875 22 percent for incomes over $40,125 24 percent for incomes over $85,525 32 percent for incomes over $163,300 35 percent for incomes over $207,350 37 percent for incomes over $518,400

Will tax brackets change in 2020?

The tax rates for each tax bracket haven't changed for 2020 haven't changed; they're the same as the rates that were in effect for the 2019 tax year. However, the IRS has adjusted each bracket to account for inflation.

How can I calculate my income tax?

You can use the IRS's online Tax Withholding Estimator to calculate how much you'll owe in income tax. It enables you to know for sure if you're withholding enough money to cover your income tax before tax season arrives.

Are we getting tax returns 2021?

You will still have to file your 2020 tax return in 2021. The IRS recommends sending your return in early so you receive any potential refund in a timely manner.

How are tax brackets calculated?

Your tax bracket is calculated based on your taxable income -- which means your income after any appropriate or applicable deductions. Because you are taxed on a progressive system, this means your income will be taxed in portions. For example, the first $9,875 of your income will be taxed at 10 percent. The next chunk of your income will be taxed in the next tax bracket of 12 percent.

Sources

Associated Press. "Huckabee drops out of presidential race." MSNBC. 3/4/08. http://www.msnbc.msn.com/id/23473706/ (Accessed 4/27/08)
Bonsor, Kevin. "How Income Taxes Work." HowStuffWorks.com. https://money.howstuffworks.com/income-tax2.htm (Accessed 4/27/08)
Investopedia. "Tax Bracket." http://www.investopedia.com/terms/t/taxbracket.asp. (Accessed 4/26/08)
IRS. "Form 1040-ES." http://www.irs.gov/pub/irs-pdf/f1040es.pdf (Accessed 4/26/08)
Lewis, Roy. "What's My Tax Bracket?" The Motley Fool. 1/9/08. http://www.fool.com/personal-finance/taxes/2008/01/09/whats-my-tax-
bracket.aspx (Accessed 4/26/08)
MoneyChimp. "Federal Tax Brackets." http://www.moneychimp.com/features/tax_brackets.htm (Accessed 4/26/08)
The Tax Foundation. "U.S. Federal Individual Income Tax Rates History, 1913-2008." 1/7/08. http://www.taxfoundation.org/publications/show/151.html (Accessed 4/26/08)
U.S. Department of the Treasury. "History of the U.S. Tax System." http://www.treasury.gov/education/fact-sheets/taxes/ustax.shtml (Accessed 4/26/08)