How Tax Brackets Work

During his U.S. presidential candidacy in 2000, Ralph Nader was a proponent of a flat income tax rate. On February 28, 2008, he announced his 2008 running mate, Matt Gonzalez. See more tax pictures.
Brendan Smialowski/Getty Images

You might be on your last dollar, but it’s not always a reason to sing the blues. In fact, in the strange world of taxation, your last dollar could actually put you in a higher tax bracket. Put on your shades, grab your guitar, and read on.

A tax bracket is a range of incomes taxed at a specific rate. For example, the lowest tax bracket might be $0-$8,025; the second might be $8,026-$32,550; the third $32,551-$78,850. When your income moves above or below the range limits (from $8,025 to $8,026 for example), you switch to a different tax bracket.

Taxes Image Gallery 

Tax brackets are components of a progressive income tax system, in which taxes increase progressively as income increases. The idea is that high-income taxpayers can shoulder the burden of a high tax rate. Low-income taxpayers pay less because they can't afford to pay high taxes.

­Tax bracket is a simpler way to say marginal tax rate. A marginal tax rate is the "tax paid on an additional dollar of income" [source: Investopedia]. That additional dollar is also known as your "last dollar." In a progressive tax system, the portion of your income that does not exceed the upper limit of a tax bracket is your "last dollar."

In this article, you'll learn where your last dollars fall. You'll find out how to find your U.S. tax bracket and learn a little about the history of tax brackets in the United States.

More to Explore