Ask the Internal Revenue Service what your tax rate is, and the response will be something along the lines of, "Well, how much do you make?" The percentage you pay in federal income taxes gets larger as your taxable income increases, and the specific percentage depends on your specific income.
As of 2013, the IRS had seven different tax rates. Taxpayers with the smallest taxable incomes paid 10 percent, and tax rates rose with income to 15, 25, 28, 33, 35 and 39.6 percent. The highest rate that applies to your income is your "tax bracket." But here's the tricky part: Even if you're in, say, the 25 percent tax bracket, your taxes don't actually equal 25 percent of your taxable income. Often, your true tax rate doesn't even come close to your bracket rate.
The tax rates charged by the IRS are "marginal" rates. That means each rate applies only to a specific slice of your taxable income. For a single person in 2013, for example, the 10 percent rate applied to the first $8,925 of taxable income. The 15 percent rate applied to income from $8,925 to $36,250, the 25 percent rate to income from $36,250 to $87,850, and so on. The top rate, 39.6 percent, applied to the portion over $400,000. For married couples filing jointly, the rates were the same, but the cutoff points ranged from 10 percent on income up to $17,850 to 39.6 percent on income over $450,000.
Figuring Your Tax
Say you were married and filing a joint return with a combined taxable income of $80,000. Using the 2013 brackets, the first $17,850 of that would get taxed at 10 percent, so you owe $1,785 so far. Next, the portion from $17,850 to $72,500 gets taxed at 15 percent. That's another $8,197.50 in taxes. Finally, the portion from $72,500 to $80,000 gets taxed at 25 percent. That's $1,875. Your total tax: $11,857.50. Even though you're in the 25 percent bracket, your federal taxes actually add up to about 14.8 percent of your taxable income.
You may have heard moving up in tax brackets leaves you with less money after taxes. Nuh-uh. Say you're a single person making $36,000 and you get a raise to $38,000, which moves you from the 15 percent bracket to the 25 percent. Fifteen percent of $36,000 is $5,400 while 25 percent of $38,000 is $9,500. So your $2,000 raise, the argument (incorrectly) goes, has increased your taxes by $4,100. The mistake is the assumption the new "tax bracket" rate applies to your entire income. In truth, it covers the smidgen of income that pokes into the new bracket.
- Comstock/Comstock/Getty Images
- Can I Have My Taxes Reviewed if I Believe I Don't Really Owe?
- What Can I Do if My 1099 Is Incorrect?
- Can You Deduct Electric Bills for Farm Expenses?
- Can I Deduct Phone Costs on Schedule C?
- How Much to Set Aside for Taxes for Freelancing
- How to Report K-1 Amounts on Taxes
- How to Have Property Taxes Re-Evaluated
- Can My In-Ground Pool Add to My Property Taxes?
- What Are Three Primary Financial Requirements for Purchasing a Home?
- If a Creditor Garnishes Your Wages, Can You Settle With Them?