Tax Brackets

The United States operates under a progressive tax code, which means — all things being equal — the more you earn, the more income taxes you owe. (Exceptions apply; we’ll visit that later.) Earned income — income you receive from your job(s) — is measured against seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

The bracket you land in depends on factors that include total income, total adjusted income, filing jointly or as an individual, dependents, deductions, and credits.

You can try to squeeze into a lower tax bracket by reducing your taxable income. Succeeding is difficult and requires a fair amount of planning, which is why it’s always smart to do your taxes early.

For instance, if you’re contributing to your company’s 401(k) plan, congratulations! You’re already making the tax code work for you. If you have rental property and you’re depreciating the dwelling against your rental income (even as the value of the property rises), huzzah! That’s another perfectly legitimate tax code win. Making regular contributions to a registered charity or nonprofit? Keep it up! Not only is your money helping your community, if you itemize, those donations are deductible.

2023 Tax Brackets

In October 2022, the IRS released the new tax brackets for 2023, with income amounts adjusted for inflation.

Here is a look at what the brackets and tax rates are for 2023 (filing 2024):

*Qualifying widow(er)s can use the joint tax rates

» Jump to: 2022 tax brackets
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» Jump to: 2020 tax brackets
» Jump to: 2019 tax brackets

The Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 guides current tax policy. The changes made by the act expire for individuals in 2025 but will stay in place for businesses. Once the TCJA expires, Congress will have to decide what provisions stay and which will be done away with. Among the acts notable achievements:

• Number of brackets remained steady at seven.
• Four of the lowest five marginal rates dropped 1-4 points; the top rate sank 2.6 points, to 37%.
• Modified bracket widths.
• Eliminated the personal exemption, but nearly doubled the standard deduction.
• Indexed brackets and other provisions to the Chained Consumer Price Index (C-CPI) measure of inflation (including the standard deduction, which for 2023 (filing in 2024) stands at $13,850 for single filers, $20,800 for heads of household, and $27,700 for joint filers and some surviving spouses).
• Retains the charitable contribution deduction for filers who itemize.
• Caps the mortgage interest deduction to the first $750,000 in principal value.
• Eliminated home equity loan/line of credit interest deduction unless the money is used for home improvements.
• Eliminated many personal deductions, including moving expenses, alimony, and most personal business expenses for those who aren’t self-employed.
• Deduction for state and local income, sales, and property taxes limited to a combined $10,000.

While taxpayers still may itemize deductions if their total deductions work to their advantage (usually for the highest earners), boosting the standard deduction was designed to simplify calculations for the vast majority of filers — and it worked. The first year the tax changes went into effect, the 2018 tax year, 90% of households opted for the standard deduction, up from 70% in previous years (Urban-Brookings Tax Policy Center).

How to Determine Your Tax Bracket

As mentioned above, determining your tax bracket hinges on two things: filing status and taxable income. Here are some useful details:

The IRS recognizes five different filing statuses:

• Single Filing – Unmarried, legally separated and divorced individuals all qualify as single.
• Married Filing Jointly – A married couple agrees to combine income and deduct the allowable expenses.
• Married Filing Separately – A married couple files separate tax returns to keep an individual income lower. This is beneficial in certain situations, like repaying student loans under an income-driven repayment plan.
• Head of Household – Unmarried individuals who paid more than half the cost of keeping up a home for the year and have a qualifying person living with them in their home for more than half the year.
• Qualifying Widow(er) – A widow(er) can file jointly in the year of their spouse’s death. A qualifying widow(er) has a dependent child and can use the joint tax rates and the highest deduction amount for the next two years after their spouse’s death.

How to Calculate Taxable Income

Arriving at your taxable income requires a bit of arithmetic.

Begin with your gross income, which is all the money you earned during the tax year: income from jobs, from owning a business, retirement (pension, 401(k) withdrawals, Social Security), rents, and/or investment earnings.

Next up: determining your adjusted gross income (AGI). These are adjustments taken before any deductions are applied. These may include student loan interest, tuition and fees, as well as contributions to a traditional IRA, among others. Subtract these expenses from your gross income to arrive at your AGI.

Finally, apply deductions.

Again, you may itemize your deductions by listing eligible expenses, or you may take the standard deduction. Most people qualify for the standard deduction (see below for exceptions), but if you think your allowable deductions exceed the standard deduction — you’re paying a lot in home mortgage interest; your property or state income taxes are high; medical expenses take a big bite out of your budget — it would make sense to take the time to itemize your deductions and see if it exceeds the allowable standard deduction.

The standard deduction for the 2023 tax year, due April 15, 2024:

• Single filers: $13,850
• Married filing jointly: $27,700
• Married filing separately: $13,850
• Heads of households: $20,800

Standard Deduction Non-Qualifiers

You don’t qualify for the standard deduction if you are:

• A married individual whose spouse itemizes deductions and files as married filing separately
• An individual who was a nonresident alien or dual status alien during the year (some exceptions apply, see IRS Tax Topic 551)
• An individual who files a return for a period of less than 12 months because of a change in their annual accounting period
• An estate or trust, common trust fund, or partnership

How Tax Brackets Work

As mentioned earlier, the United States follows a progressive income tax system. In that scheme, not all income is treated equally, which makes a certain amount of sense as long as we lack an appetite for a flat tax plan — as we shall attempt to demonstrate.

When someone talks about being in the 24% bracket, that doesn’t mean all of their taxable income endures the same 24% bite, but instead only their taxable income above a certain amount (depending on filing status).

This is the headache-inducing beauty of the American system of marginal rates.

Marginal Tax Rates

Marginal tax rates refer to the rate you pay at each level (bracket) of income. Increments of your income are taxed at different rates, and the rate rises as you reach each of the seven “marginal” levels in the current system. This means you may have several tax rates that determine how much you owe the IRS.

Said another way, earnings stack upon earnings as the year goes on, much like an inverted pyramid. Whether your taxable income is $40,000 a year, $400,000, or $40 million, the first $10,000 you earn is taxed the same (10%). The same goes for the next $30,000 (12%). And so it goes through the various levels until the brackets top out at 37% ($539,900 for single filers).

Under this system, everyone who has earned income pays at least a little bit — everyone has “skin in the game” — but higher earners pay higher rates on their top-end taxable income.

Effective Tax Rates

The actual percentage of the taxable income you owe the IRS is called an effective tax rate. To calculate your effective tax rate, take the total amount of tax you paid and divide that number by your taxable income. Your effective tax rate will be much lower than the rate from your tax bracket, which claims against only your top-end earnings.

Alternative Minimum Taxes (AMT)

Enacted by Congress in 1969 and running parallel to the regular income tax, the alternative minimum tax (AMT) was originated to prevent certain high-income filers from using elaborate tax shelters to dodge Uncle Sam.

Under AMT, assorted deductions and tax preferences allowed by the regular income tax are disallowed and added back into the taxpayer’s income, resulting in an alternative minimum taxable income (AMTI). An exemption amount (based on filing status) is applied, and the result is multiplied by the applicable AMT bracket to produce a tax amount.

AMT brackets are 26% and 28%. Since 2015, AMT exemption amounts — the figure subtracted from AMTI — have been adjusted for inflation.

In short, AMT payers calculate their income twice — regular rules, AMT rules — and pay the higher amount owed.

Before you reach for the Advil, two things: Genuinely wealthy filers have tax accountants to figure this stuff out. The rest of us can rely on reasonably priced tax software.

Source: Internal Revenue Service

Capital Gains Tax

Remember all that business a few years back when billionaire investor Warren Buffett lamented that his effective income tax rate was lower than that of his secretary? That’s simply because his secretary, who was not scraping by, was earning regular income; she got a paycheck. Buffett’s income came from investing: putting money at risk to help companies grow, and, thus, making his money grow along with them.

Because Congress traditionally has recognized the value of at-risk capital to the health of the U.S. economy, long-term capital gains — gains from securities sold after having been held for at least a year — are taxed at rates lower than comparable ordinary income. Tax brackets for long-term capital gains (investments held for more than one year) are 15% and 20%. An additional 3.8% bump applies to filers with higher modified adjusted gross incomes (MAGI).

If you held an investment for less than one year before selling it for a gain, that is classified as a “short-term capital gain” and you pay the same rate as ordinary income.

Kiddie Tax

Sorry, parents. There’s no hiding income in your children’s names. The so-called “kiddie tax” (officially Unearned Income of Minor Children Tax) is applied to any unearned income of children under the age of 19 and college students up to the age of 24.

Youngsters with accounts that earn more than $1,250 in dividends and interest in 2023 will be liable for taxes according to the rates applied to trusts and estates. Parents may elect to include a child’s gross income as part of their own gross income, and to calculate the “kiddie tax,” as long as the child’s unearned income doesn’t exceed $12,500.

How to Calculate Your Tax Bill

Effective tax rates don’t factor in any deductions. To get closer to what percentage of your salary goes to Uncle Sam, try using your adjusted gross income. Assuming the single filer with $80,000 in taxable income opted for the standard deduction, the amount of AGI that went to the IRS was about half of 22%.

Here’s how that works out:

Subtract the standard deduction to determine taxable income ($80,000-$13,850=$66,150).

Break the taxable income of $66,150 into tax brackets (the first $11,000 x .1 (10%); the next chunk – $33,725 (income up to $44,725, minus the $11,000 in the first bracket) x .12 (12%); and the remaining $21,425 x .22 (22%) to produce taxes per bracket of $1,100 + $4,047 + $4,714 = total tax bill of $9,861.

For a final figure, take your gross income before adjustments. Add back in your allowable “above the line” deductions — for example, retirement and health savings account contributions, charitable deductions — and divide your tax bill by that number. The overall rate for our single filer with $80,000 in adjusted gross income could be well under the $9,861 original figure.

State and Local Tax Brackets

States and cities that impose income taxes typically have their own brackets, with rates lower than the federal government’s. Similar to federal taxes, many state income tax rates rise with income, though most top out around 6%-8%.

California in 2023, with 10 brackets, had the highest state tax rate for the wealthy in the United States. Near the bottom in the Golden State, people with an income between $10,099 and $20,198 paid 2%, but people with an income of $1 million or more paid a marginal rate of 13.30%.

Iowa had nine brackets in 2023, with the lowest 0.67% for those who earn less than $1,743 and the highest 8.53% for people who earn more than $78,435.

Hawaii, with 12 brackets, charged 1.40% for people who make less than $2,400; those who earn $200,000 or more pay 11%.

Arizona has the lowest state income taxes, with two brackets. People who make less than $28.653 pay 2.55%; people who make more pay 2.98%.

Arkansas has three brackets: those who make less than $4,300 pay 2%, those who make less than $8,500 pay 4%, and those who make more than $8,500 pay 4.90%.

Some 10 states keep it simple, with one tax rate for everyone: Colorado, 4.4%; Illinois, 4.95%; Indiana, 3.23%; Kentucky, 5%; Massachusetts, 5%; Michigan 5.30%, North Carolina, 4.99%; Pennsylvania, 3.07%; Utah, 4.85% and Washington state, 7%.

Seven states – Florida, Alaska, Wyoming, Washington, Texas, South Dakota, and Nevada – have no state income tax. Tennessee and New Hampshire tax interest and dividend income, but not income from wages.

How Tax Brackets Add Up

In 2022, the IRS collected more than $4.9 trillion from American individuals and businesses, about 96% of all government funding.

The agency processed more than 262.8 million federal tax returns, 160.6 million of them for individuals. Some 150.6 million taxpayers e-filed, almost 94% of all individual tax returns. The IRS issued 237.8 million tax returns totaling nearly $512 billion.

The IRS also issued $50.9 billion in payments to taxpayers during FY 2022 as a result of legislation passed by Congress in response to the COVID-19 pandemic. Of that amount, $3.7 billion was Economic Impact Payments and $47.3 billion was Advance Child Tax Credits.

How to Reduce Taxable Income and Drop into a Lower Tax Bracket

Two common ways to reduce your tax bill are by using credits and deductions. The first is a dollar-for-dollar reduction in the amount of tax you owe. The second trims your taxable income, possibly slipping you into a lower tax bracket.

Tax credits come in two types: nonrefundable and refundable.

Nonrefundable credits are deducted from your tax liability until your tax due equals $0. Examples include the child and dependent care credit, adoption credit, saver’s credit, mortgage interest tax credit, and alternative motor vehicle credit.

Refundable credits are paid out in full, no matter what your income or tax liability. Examples include the earned income tax credit (EITC), child tax credit, and the American Opportunity Tax Credit.

Which of these tax credits apply to your situation?

• Child tax credit. Trim your bill by up to $2,000 for each qualifying minor child in your household. Score a $500 credit for a non-child dependent (a parent you support, perhaps).
• Child and dependent care credits generally can return 20% to 35% of up to $3,000 of child care and related costs for youngsters under 13, a spouse or parent who’s incapacitated, or another dependent so you can work. For two or more dependents, you can claim up to $6,000 in care-related expenses.
• Earned income tax credit returns between $600 and $7,430 in tax year 2023 for low-income earners, depending on income, filing status and number of children.
• The Adoption Credit of $15,950 in tax year 2023 applies to the adoption of a child with special needs; the maximum credit for other adoptions equals the amount of qualified expenses up to $15,950. Phaseouts apply as income rises.
• The Lifetime Learning Credit encourages ongoing educational studies but is subject to income limitations.
• The Saver’s Credit, or retirement savings contributions credit, allows low-income filers to reclaim up to half of their contributions to a qualified retirement savings account (limits apply).
• A residential energy credit can return up to 26% of the installation cost of solar energy systems, such as solar water heaters and solar panels.

Deductions, on the other hand, reduce your taxable income. Accumulate enough of them in a qualifying number or amount, and you can slide a tax bracket or two.

Popular deductions include:

• Mortgage interest — tracked by and reported to you by your lender, reduces taxable income by the amount of interest you pay (up to the first $750,000 of the mortgage for homes bought after Dec. 15, 2017).
• Contributions to a 401(k) — up to $22,500 (up to $30,000 if you’re 50 or older) comes off the top of your gross income. Traditional IRA contributions are deductible, but how much you can sock away depends on assorted factors, including whether you have a retirement plan at work and how much you earn.
• Student loan interest deductions, student loan interest payments, up to $2,500, can be deducted by taxpayers with modified adjusted gross income less than $75,000 ($155,000 for joint returns), phases out after that and there’s no deduction for those with modified adjusted gross income of $90,000 or more ($185,000 or more for joint returns).
• Charitable gifts to qualified nonprofits — from churches to the Salvation Army to the United Way to your college alumni association — in cash, securities, or property, is deductible.
• Medical expenses — qualified, unreimbursed medical expenses that are more than 7.5% of your AGI can be deducted.
• State and local taxes, up to $10,000 for married filers — $5,000 for single filers — for a combination of property taxes, state and local income taxes, or sales taxes, may be deducted.
• Health Savings Account contributions, for filers with high-deductible health coverage, are deductible — up to $3,850 for individual coverage, and up to $7,750 for family coverage in 2023. Withdrawals are tax-free, too, if they’re used for qualified medical expenses.
• Self-employment expenses for freelancers, contractors, and other self-employed people are, with restrictions, deductible.
• Home office expenses, for self-employed taxpayers, when they are used regularly and exclusively for business-related activities, can be deductible. These include rent, utilities, repairs, maintenance, real estate taxes, and other related expenses. (This deduction does not apply to workers who are employed by someone, even if they work remotely 100% of the time)
• Educator expenses, up to $300, may be deducted by teachers or other eligible educators.
• Gambling losses can be claimed as a deduction, but only up to the amount won.

Get Help from a Tax Preparer

Individuals and households who can claim tax credits and deductions may benefit from hiring a tax preparer. Accounts and tax services know how to save you money and understand the complicated tax code. What you get back in savings is often well worth the fee.

There is also online tax filing software available that can make a complicated return much easier to complete.

Previous Years’ Tax Brackets

2022 Tax Brackets (Due April 15, 2023)

Here is a look at what the brackets and tax rates are for 2022 (filing 2023):

*Qualifying widow(er)s can use the joint tax rates

2021 Tax Brackets (Due April 15, 2022)

Here is a look at what the brackets and tax rates are for 2021 (filing 2022):

*Qualifying widow(er)s can use the joint tax rates

2020 Tax Brackets (Due April, 15 2021)

Here is a look at what the brackets and tax rates are for 2020:

*Qualifying widow(er)s can use the joint tax rates

Taxes were originally due April 15, but as with a lot of things, it changed in 2020. The tax deadline was extended to July 15 in order to let Americans get their finances together without the burden of a due date right around the corner.

2019 Tax Brackets (Due July, 15 2020)

Here is a look at what the brackets and tax rates were for 2019:

*Qualifying widow(er)s can use the joint tax rates