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How Tax Brackets Work: 2018 Examples and Myth Busting

Updated tax brackets for the year 2018

Your tax bracket shows you the tax rate that you will pay for each portion of your income. For example, if you are a single person, the lowest possible tax rate of 10 percent is applied to the first $9,525 of your income in 2018. The next portion of your income is taxed at the next tax bracket of 12 percent. That continues for each tax bracket up to the top of your taxable income.

The progressive tax system ensures that all taxpayers pay the same rates on the same levels of taxable income. The overall effect is that people with higher incomes pay higher taxes.

What tax bracket are you in, and what does that really mean?

Your tax bracket, roughly speaking, is the tax rate you pay on your highest dollar of taxable income.

Your tax bracket is not the tax rate you pay on all of your income after adjustments, deductions, and exemptions.

Your tax bracket only determines your individual income tax rates for each additional dollar of income (ignoring the effects of rounding.)

We have federal tax brackets in the U.S. because we have a progressive income tax system. That means the higher your income level, the higher a tax rate you pay. Your tax bracket (and tax burden) becomes progressively higher.

Progressive rates are based on the concept that high-income taxpayers can afford to pay a high tax rate.

Low-income taxpayers pay not just lower taxes overall, but a lower percentage of their income within this tax system.

How tax brackets work

Say you’re single with no dependents, and your taxable income is $9,000.

Your marginal tax rate, according to the Federal Income Tax Brackets chart below, is 10 percent. You pay $900 in income tax. That’s simple.

What if your taxable income is $19,000?

As a Single filer, you’re now in the 12 percent tax bracket. That doesn’t mean you pay 12 percent on all your income, however.

You pay 10 percent on the first $9,525, plus 12 percent of the amount over $9,525.

Here’s the math:

First tax bracket: $9,525 X 10% = $952.50
Second tax bracket: ($19,000 – $9,525) X 12%  = $1,137.00
Total income tax: $2,089.50

What if your taxable income is $115,000?

As a Single filer, you moved up to the 24 percent tax bracket so things get a bit more complicated. In this case:

You pay 10 percent on the first $9,525

plus 12 percent of the amount between $9,526 and $38,700

plus 22 percent of the amount between $38,701 and $82,500

plus 24 percent of the amount over $82,501.

Here’s the math:

First tax bracket: $9,525 X 10% = $952.50
Second tax bracket: ($38,700 – $9,525) X 12%  = $3,501.00
Third tax bracket: ($82,500 – $38,700) X 22% = $9,636.00
Fourth tax bracket: ($115,000 – $82,500) X 24% = $7,800.00
Total income tax: $21,889.50

Find your tax bracket in the following chart based on your filing status and 2018 income:

Federal Income Tax Brackets

2018 Tax Brackets 

Tax rate 2018 - Single Filer 2018 - Joint Filer 2018 - Married Filing Separate 2018 - Head of Household
10% $0 to $9,525 $0 to $19,050 $0 to $9,525 $0 to $13,600
12% $9,526 to $38,700 $19,051 to $77,400 $9,526 to $38,700 $13,601 to $51,800
22% $38,701 to $82,500 $77,401 to $165,000 $38,701 to $82,500 $51,801 to $82,500
24% $82,501 to $157,500 $165,001 to $315,000 $82,501 to $157,500 $82,501 to $157,500
32% $157,501 to $200,000 $315,001 to $400,000 $157,501 to $200,000 $157,501 to $200,000
35% $200,001 to $500,000 $400,001 to $600,000 $200,001 to $300,000 $200,001 to $500,000
37% $500,001 or more $600,001 or more $300,001 or more $500,001 or more

2017 Tax  Brackets

Tax rate 2017 - Single 2017 - Married, filing jointly 2017 - Married, filing separately 2017 - Head of household
10% $0 to $9,325 $0 to $18,650 $0 to $9,325 $0 to $13,350
15% $9,326 to $37,950 $18,651 to $75,900 $9,326 to $37,950 $13,351 to $50,800
25% $37,951 to $91,900 $75,901 to $153,100 $37,951 to $76,550 $50,801 to $131,200
28% $91,901 to $191,650 $153,101 to $233,350 $76,551 to $116,675 $131,201 to $212,500
33% $191,651 to $416,700 $233,351 to $416,700 $116,676 to $208,350 $212,501 to $416,700
35% $416,701 to $418,400 $416,701 to $470,700 $208,351 to $235,350 $416,701 to $444,550
39.60% $418,401 or more $470,701 or more $235,351 or more $444,551 or more

Find out which IRS tax bracket you are in. Estimate your tax rate with our tax bracket calculator. If you’re wondering how much you’ll save after the tax reform bill, check out our Tax Cut & Jobs Act calculator.

Busting a tax bracket myth

Some people think if they earn more money, they are in a higher tax bracket. They believe they pay more taxes and may actually have less money left over than they would if they had earned less.

Using the example above, you can see that’s not true.

Each dollar you earn only affects the tax rate and taxes owed on additional income. It does not change the rate applied to dollars in lower tax brackets.

Unless you are in the lowest tax bracket, you actually have two or more tax brackets. If you are in the 24 percent tax bracket, for example, you pay tax at four different rates – 10 percent, 12 percent, 22 percent, and 24 percent.

Based on the tax brackets, you always have more money after taxes when you earn more. But, of course, rates are not the only factor in your final tax bill. You can lose tax benefits that phase out at higher income levels, such as education for higher education. In some tax scenarios, it might make sense to avoid higher tax brackets if possible.

It pays to use TaxAct as a planning tool to see how different levels of income affect your tax benefits and final tax bill.

Use the tax code to make better decisions

Let’s say you’re considering working overtime and making an additional $1,000 in a year.

If you know you’re in the 24 percent tax bracket, you’ll pay $240 in income tax on that extra money.

You’ll also pay 7.65 percent in Social Security and Medicare employee withholding, plus any state tax and other mandatory withholding.

Earning an additional $1,000 is a great idea, but don’t be surprised when you discover that one-third or more of your pay goes to taxes.

If you’re contemplating making a charitable contribution before the end of the year, knowing your tax bracket and filing status can help determine how much your contribution will save you in taxes. However, that’s assuming you will itemize your deductions.

For example, if you’re in the 22 percent tax bracket, every $100 you contribute to charity saves you $22 in federal income taxes.

Knowing your tax rate also helps when you’re thinking about making retirement plan contributions. If you contribute to a traditional 401(k) plan or traditional IRA, you’ll reduce your state and federal income tax. In turn, that makes your contribution more affordable.

About Sally Herigstad

Sally Herigstad is a certified public accountant and personal finance columnist and author of Help! I Can't Pay My Bills, Surviving a Financial Crisis (St. Martin's Griffin). She writes regularly at CreditCards.com, Bankrate.com, Interest.com, RedPlum, and MSN Money. She is an experienced speaker and a member of Toastmasters International. Follow Sally on Twitter.

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