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:
- 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 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:
- $0 to $9,525 (taxed at 10 percent)
- $9,526 to $38,700 (taxed at 12 percent)
- $38,701 to $82,500 (taxed at 22 percent)
- $82,501 to $157,500 (taxed at 24 percent)
- $157,501 to $200,000 (taxed at 32 percent)
- $200,001 to $500,000 (taxed at 35 percent)
- $500,001 or more (taxed at 37 percent) [source: U.S. Tax Center]
Karen's taxable income of $70,000 falls into the third tax bracket of $38,701-$82,500, 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 $9,525 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: $9,525 x 0.10 = $952
Second Bracket: ($38,700 - $9,525) x 0.12 = $3,501
Third Bracket: ($70,000 taxable income - $38,700) x 0.22 = $6,886
Total Tax: $952 + $3,501 + $6,886 = $11,339
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 $19,050 (taxed at 10 percent)
- $19,051 to $77,400 (taxed at 12 percent)
- $77,401 to $165,000 (taxed at 22 percent)
- $165,001 to $315,000 (taxed at 24 percent)
- $315,001 to $400,000 (taxed at 24 percent)
- $400,001 to $600,000 (taxed at 35 percent)
- Over $600,000 (taxed at 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 taxes:
First Bracket: $19,050 x 0.10 = $1,905
Second Bracket: ($77,400 - $19,050) x 0.15 = $8,752
Third Bracket: ($165,000 - $77,400) x 0.22 = $19,272
Fourth Bracket: ($315,000 - $165,000) x 0.24 = $36,000
Fifth Bracket: ($325,000-$315,000) x 0.32 = $3,200
Total Tax: $1,905 + $8,752 + $19,272 + $36,000 + $3,200 = $69,129
Raoul and Gretchen's taxable income is about $10,000 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 $69,129 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.