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How Tax Brackets Work

By: John Barrymore & Kathryn Whitbourne  | 

Finding Your Tax Bracket

Finding your tax bracket is actually pretty easy. First you need to know your taxable income. Taxable income is your adjusted gross income (AGI) minus your standard or itemized deductions.

Let's put this into a working example we'll use throughout the section:

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Karen's taxable income is $70,000.

Next you need to know your filing status:

  • Single
  • Head of household
  • Married filing jointly or Qualifying widow(er)
  • Married filing separately

Karen is single.

Next is the tax bracket. As we explained earlier, for the 2020 tax year, there are seven tax brackets for each filing status. Since Karen is filing single, she would look at IRS Schedule X, which lists the tax rates for people who file single (the rates are on the previous page.)

Karen's taxable income of $70,000 falls into the third tax bracket of $40,126 and $85,525, so she has a tax rate of 22 percent. At first glance, Karen thinks that her $70,000 will be taxed at 22 percent. Fortunately for her, that's not how the U.S. tax code works.

Karen's income will be taxed as it progresses through the tax brackets. So, her first $9,875is taxed at a rate of 10 percent. Her income that falls in the second bracket will be taxed at 12 percent. Her "last dollar" lands in the third bracket. Only the portion of her income that falls into that third bracket will be taxed at 22 percent. Here are the calculations:

First Bracket: $9,875 x 0.10 = $987

Second Bracket: ($40,125 – 9,876) x 0.12 = $3,629

Third Bracket: ($70,000 taxable income - $40,126) x 0.22 = $6,572

Total Tax: $987 + $3,629 + $6,572 = $11,188

A second example: Let's say Raoul and Gretchen are married. Their combined taxable income is $350,000. They file a joint tax return, so they consult IRS Schedule Y-1:

Married filing jointly

  • $0 to $19,750 (taxed at 10 percent)
  • $19,750 to $80,250 (taxed at 12 percent)
  • $80,251 to $171,050 (taxed at 22 percent)
  • $171,051 to $326,600 (taxed at 24 percent)
  • $326,601 to $414,700 (taxed at 24 percent)
  • $414,701 to $622,050 (taxed at 35 percent)
  • Over $622,050 (taxed at 37 percent) [source: Mengle].

Raoul and Gretchen's taxable income of $350,000 falls into the fifth income tax bracket. Here are the calculations for their taxes:

First Bracket: $19,750 x 0.10 = $1,975

Second Bracket: ($80,250 - $19,756) x 0.12 = $7,259

Third Bracket: ($171,050 - $80,251) x 0.22 = $19,976

Fourth Bracket: ($326,600 - $171,051) x 0.24 = $37,332

Fifth Bracket: ($350,000 - $326,601) x 0.32 = $7,487

Total Tax: $1,975 + $7,259 + $19,976 + $37,332 + $7,487 = $74,029

Raoul and Gretchen's taxable income is about $24,000 over the fourth bracket's upper limit. That final amount is taxed at 32 percent, or 8 percent higher than the next lowest rate. To stay out of the fifth bracket, they might consider looking for additional deductions to decrease their taxable income.

A $74,029 tax bill seems like quite a hit. But imagine being in a 94 percent tax bracket. It's happened to U.S. citizens — in living memory. Read on to learn about the history of income tax brackets.