How Tax Brackets Work


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:

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. In the 2018 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. They are [source: Rose]:

  • $0 to $9,700 -- 10 percent
  • $9,701 to $39,475 -- 12 percent
  • $39,476 to $84,200 -- 22 percent
  • $84,201 to $160,725 -- 24 percent
  • $160,726 to $204,100 -- 32 percent
  • $204,101 to $510,300 -- 35 percent
  • $510,301 or more -- 37 percent

Karen's taxable income of $70,000 falls into the third tax bracket, 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 a progressive tax rate works.

Karen's income will be taxed as it progresses through the tax brackets. So, her first $9,700 is 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: $9,700 x 0.10 = $970

Second Bracket: ($39,475 - $9,700) x 0.12 = $3,573

Third Bracket: ($70,000 taxable income - $39,475) x 0.22 = $6,715.50

Total Tax: $970 + $3,573 + $6,715.50 = $11,258.50

A second example: Let's say Raoul and Gretchen are married. Their combined taxable income is $325,000. They file a joint tax return, so they consult IRS Schedule Y-1:

Married filing jointly

  • $0 to $19,400 -- 10 percent
  • $19,401 to $78,950 -- 12 percent
  • $78,951 to $168,400 -- 22 percent
  • $168,401 to $321,450 -- 24 percent
  • $321,451 to $408,200 -- 32 percent
  • $408,201 to $612,350 -- 35 percent
  • Over $612,350 -- 37 percent [source: Rose].

Raoul and Gretchen's taxable income of $325,000 falls into the fifth income tax bracket. Here are the calculations for their tax:

First Bracket: $16,050 x 0.10 = $1,940

Second Bracket: ($78,950 - $19,400) x 0.15 = $7,146

Third Bracket: ($168,400 - $78,950) x 0.22 = $19,679

Fourth Bracket: ($321,450 - $168,400) x 0.24 = $36,732

Fifth Bracket: ($325,000-$321,450) x 0.32 = $1,136

Total Tax: $1,940 + $7,146 + $19,679 + $36,732 + $1,136 = $66,033

Raoul and Gretchen's taxable income is less that $4,000 over the fourth bracket's upper limit. That final $3,550 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 $66,033 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.