The US tax system has seven marginal income tax brackets. The bracket depends on taxable household income after adjustments, deductions, exemptions, and credits. Tax rates are different for single filers and married filing jointly.
As income increases, the marginal tax rate also increases. This is done to push wealthy individuals into a higher tax bracket to pay more than those with less wealth/income (who would fall below the threshold of this new bracket).
Please refer to the 2021-2022 Tax Brackets and Federal Income Tax Rates.
How Tax Brackets Work
The United States has a liberal tax system in which people with larger taxable incomes are taxed at higher rates.
- You don’t have to pay a particular federal income tax rate on everything you earn under the progressive tax system.
- The government calculates your taxable income by dividing your income into portions, known as tax ranges, and taxing each portion at the corresponding rate. This is fantastic because you won’t pay that rate on your entire income no matter what bracket you’re in. (This is the idea behind the concept of an effective tax rate.)
- Let’s say you’re a single filer with $32,000 in taxable income. In 2021, this puts you in the 12% tax bracket. However, do you have to pay 12% on all $32,000? No. You only pay 10% on the first $9,950; after that, it’s 12% on the rest.
- If you earned $50,000 in taxable income, you’d pay 10% on the first $9,950 and 12% on everything between $9,951 and $40,525. Then you’d pay 22 percent on the rest because some of your taxable income falls into the 22 percent tax bracket. Even though you’re in the 22% tax bracket, your total cost would be about $6,800 — about 14% of your taxable income. Your effective tax rate is the proportion of what you earn the government taxes.
- That is the offer only for federal income taxes. Your state may have different brackets, a flat income tax, or no income tax at all.
What is a Marginal Tax Rate?
Your marginal tax rate is the taxable income rate you would pay on an additional dollar of income, and this is generally equivalent to your tax bracket.
If your taxable income is $30,000, you are in the 12% tax bracket, for example. If your taxable income rises by $1, you will be taxed at 12% on that addition.
If your taxable income were $41,000, however, most of it would still fall within the 12% tax bracket, although a few hundred dollars would be subject to a 22% tax rate. Your marginal tax rate would be 22%.
How to Shift Into a Lower Tax Bracket and Save Money on Your Federal Income Taxes
Credits and deductions are two common strategies to decrease your tax burden.
- The difference is that credits directly decrease the amount of tax you owe; they don’t change your tax bracket.
- Deductions, on the other hand, reduce how much of your income is taxable. The majority of individuals in the highest federal tax bracket benefit from deductions because they lower their taxable income by the percentage of their top marginal rate (the rate at which you pay taxes). A $1,000 deduction may save you as much as $220 if you fall into the 22 percent tax bracket.
In other words, claim all of the deductions you can — they may lower your taxable income and push you into a lower tax bracket, resulting in a lower tax burden.
Want to know more? You can call The Oasis Firm today and ask us your pressing questions about tax preparation and filing. Call us at 833-886-2747!