Tax bracket

What Is a Tax Bracket?

A tax bracket is a range of income that is taxed at a specific rate by a government. It is a fundamental component of a progressive tax system, a system where individuals with higher taxable income pay a larger percentage of their income in taxes. The concept of tax brackets is central to taxation, determining an individual's marginal tax rate and ultimately their total tax liability. Governments utilize tax brackets to structure their revenue collection, often adjusting them annually for inflation and economic conditions.

History and Origin

The concept of taxing income in varying tiers has roots in early forms of government revenue collection. In the United States, the nation's first income tax was enacted in 1862 by President Abraham Lincoln to help finance the Civil War. This early income tax also employed a system of different rates for different income levels, effectively establishing the first "tax brackets" in the U.S.¹⁶, ¹⁷. This initial income tax was repealed after the war but was later revived and made permanent with the ratification of the 16th Amendment to the U.S. Constitution in 1913, which granted Congress the power to lay and collect taxes on incomes "from whatever source derived"¹⁴, ¹⁵. Since then, the structure and rates of tax brackets have evolved significantly through various legislative acts, reflecting changing economic priorities and societal needs.

Key Takeaways

• A tax bracket defines a range of income taxed at a specific percentage rate.
• Most progressive tax systems use multiple tax brackets, with higher income ranges subject to higher rates.
• Only the portion of income that falls within a specific bracket is taxed at that bracket's rate.
• Understanding tax brackets is crucial for personal financial planning and optimizing tax deductions and tax credits.
• Tax bracket thresholds are often adjusted annually for inflation.

Formula and Calculation

Calculating federal income tax in a progressive system involves applying different tax rates to different portions of your taxable income, based on your filing status. The total tax is the sum of the taxes calculated for each bracket.

Let's denote:

• (T) = Total Tax Liability
• (TI) = Taxable Income
• (B_n) = Upper limit of tax bracket (n)
• (R_n) = Tax rate for tax bracket (n)
• (B_0) = 0 (Lower limit of the first bracket)

The calculation for a system with (k) tax brackets would be:

$T = \sum_{n=1}^{k} \text{max}(0, \text{min}(TI, B_n) - B_{n-1}) \times R_n$

This formula states that for each tax bracket, you calculate the income falling within that bracket's range (up to your total taxable income) and multiply it by that bracket's specific rate. For instance, if a taxpayer's gross income is reduced to a certain taxable income after considering the standard deduction or itemized deductions, that taxable income is then allocated across the applicable tax brackets.

Interpreting the Tax Bracket

Interpreting your tax bracket means understanding which percentage rate applies to the last dollar of your taxable income, known as your marginal tax rate. It is a common misconception that if a taxpayer's income pushes them into a higher tax bracket, their entire income will be taxed at that higher rate. This is incorrect. Only the portion of income that falls within that higher bracket is subject to its associated rate¹³.

For example, if the 10% tax bracket covers income up to $11,600 and the 12% bracket covers income from $11,601 to $47,150 (for a single filer in 2024), an individual with a taxable income of $15,000 will pay 10% on the first $11,600 and 12% on the remaining $3,400 ($15,000 - $11,600)¹². This tiered system is a core feature of progressive taxation, designed to levy higher taxes on progressively larger incomes.

Hypothetical Example

Consider an individual, Alex, who is a single filer and has a taxable income of $70,000 for the 2024 tax year. Based on the 2024 federal tax brackets for single filers¹⁰, ¹¹:

• 10% bracket: $0 to $11,600
• 12% bracket: $11,601 to $47,150
• 22% bracket: $47,151 to $100,525

Here's how Alex's tax liability would be calculated:

1. First portion (10% bracket): Alex pays 10% on the first $11,600.
   $11,600 (\times) 0.10 = $1,160
2. Second portion (12% bracket): The income between $11,601 and $47,150 is $35,550 ($47,150 - $11,600). Alex pays 12% on this amount.
   $35,550 (\times) 0.12 = $4,266
3. Third portion (22% bracket): The remaining income is $70,000 - $47,150 = $22,850. Alex pays 22% on this amount.
   $22,850 (\times) 0.22 = $5,027

Alex's total tax liability would be the sum of these amounts:
$1,160 + $4,266 + $5,027 = $10,453.

Alex's highest tax bracket is 22%, but only $22,850 of the total $70,000 is taxed at that rate. This demonstrates the marginal nature of tax brackets.

Practical Applications

Tax brackets are a critical consideration in various financial planning scenarios, impacting everything from individual budgeting to large-scale fiscal policy. For individuals, understanding their current and potential future tax bracket influences decisions on retirement contributions, such as to a 401(k) or traditional individual retirement account (IRA), which can reduce current taxable income and potentially move them into a lower tax bracket⁹. Decisions regarding realizing capital gains from investments or managing investment income often hinge on their potential impact on one's tax bracket.

At a broader level, governments worldwide use tax brackets as a primary tool for fiscal policy, influencing economic growth, income redistribution, and revenue generation. Adjustments to tax brackets, such as those made annually for inflation or as part of larger tax reform initiatives, can have significant macroeconomic effects. For instance, recent global trends in tax policy indicate a shift towards more balanced approaches, sometimes involving rate increases or base-broadening initiatives within existing tax bracket structures, in response to economic pressures and the need for additional revenue⁷, ⁸.

Limitations and Criticisms

While tax brackets are a standard component of many tax systems, they face certain limitations and criticisms. One common critique relates to "bracket creep," where inflation can push taxpayers into higher tax brackets, increasing their real tax burden even if their purchasing power has not increased. This happens when the income thresholds for tax brackets are not adequately adjusted for inflation, effectively leading to higher taxes without a corresponding increase in real income⁶.

Another area of debate revolves around the progressivity of the tax bracket system. Critics sometimes argue that the difference between adjacent tax bracket rates might not be steep enough to achieve sufficient income redistribution, or conversely, that high top tax brackets could disincentivize economic activity or lead to tax avoidance. Furthermore, the complexity of a multi-bracket system, especially when combined with numerous deductions, credits, and different tax treatments for various income types (like ordinary income versus capital gains), can make it challenging for the average taxpayer to accurately estimate their true tax burden or plan effectively. Debates around overall tax policy often involve discussions about simplifying the tax code or adjusting bracket rates and thresholds to achieve specific economic or social goals.

Tax Bracket vs. Marginal Tax Rate

Although often used interchangeably in casual conversation, "tax bracket" and "marginal tax rate" refer to distinct but related concepts.

The key confusion arises because while an individual's income falls into a particular tax bracket, it does not mean their entire income is taxed at the rate of that highest bracket. Instead, the rate of the highest bracket reached becomes their marginal tax rate, indicating how any new earnings would be taxed. The overall tax paid as a percentage of total income is the effective tax rate, which is typically lower than the marginal tax rate due to the progressive nature of the tax bracket system⁴, ⁵.

FAQs

How many tax brackets are there?

The number of federal income tax brackets can vary over time due to legislative changes. For recent tax years, such as 2024 and 2025, there are typically seven federal income tax rates in the United States: 10%, 12%, 22%, 24%, 32%, 35%, and 37%¹, ², ³.

Does getting a raise push me into a higher tax bracket and tax all my income at a higher rate?

No. Getting a raise might push some of your new income into a higher tax bracket, meaning that only the additional income that falls into that new, higher bracket will be taxed at the higher rate. The income you earned previously will still be taxed at the rates of the lower tax brackets it fell into. This is how the progressive tax system works to ensure that your overall average tax rate is typically lower than your highest bracket's rate.

Are state and local taxes also based on tax brackets?

Many, but not all, U.S. states and some local governments also employ progressive income tax systems with their own sets of tax brackets. However, some states use a flat tax rate, where all taxable income is subject to a single percentage, regardless of the amount. It is important to check the specific tax laws for your state and locality.

How do tax deductions and credits affect my tax bracket?

Tax deductions reduce your taxable income, which can lower the amount of income subject to higher tax bracket rates, potentially moving some of your income into a lower bracket. Tax credits, on the other hand, directly reduce the amount of tax you owe, dollar for dollar, after your tax liability has been calculated based on the tax brackets. Both can reduce your overall tax bill.

Do tax brackets apply to all types of income?

Generally, tax brackets apply primarily to ordinary income, such as wages, salaries, and interest income. Other types of income, like qualified dividends and long-term capital gains, often have their own separate, typically lower, tax rates, which are not directly tied to the ordinary income tax brackets. Taxes like the payroll tax (for Social Security and Medicare) or estate tax also have their own rules and rates.