A tax bracket is the tax group, with a particular income tax rate, that a taxpayer falls into as a result of the amount of income they earn. The tax bracket a taxpayer falls into determines the tax rate his income will be charged with and it determines how much the taxpayer owes as tax. Every taxpayer is not taxed equally at the same tax rate but at various tax rates depending on the tax bracket their income falls into.
The tax rate progresses along with the tax brackets. This means that as a taxpayer’s income grows, the higher he/she rises in the tax bracket and then the higher the tax rate to determine taxes. Taxpayers receiving a high income fall into tax brackets with higher tax rates as compared to low-income earners that have a lower tax rate, depending on the system of taxation in place. This gives allowance for every individual, no matter their financial state in the economy, to be able to pay their own fair share of taxes without it being too much or too little in relation to the individual income received.
If a flat tax rate is being charged for every taxpayer, irrespective of their financial status or income, it might be equal but eventually unfair to the taxpayers and even to the country. It would be unfair for an individual with a $20,000 taxable income and an individual with $200,000 in taxable income to both be taxed using the same yardsticks. Therefore, the existence of tax brackets brings necessary fairness to tax payment distribution in the nation.
How to know your tax bracket
The internal revenue service has seven different tax brackets each with its specific tax rate. To determine your tax bracket, you have to first determine which category of “tax returns filer” you belong to:
- The single filer
- The married joint filers
- The married but separate filers
- The head-of-household filer
After selecting the filing category you fall under, the next thing is to look for your income range and the tax rate allocated for that income range in your filing category.
The income range used in the determination of tax brackets is the level of your taxable income, which includes all earned income plus investments after subtracting deductions such as deductible contributions to retirement accounts, student loan interests, paid alimony, etc without subtracting exemption, however.
There are seven income ranges in the tax brackets, with specific tax rates for each, ranging from 10% to 37%, depending on your filing category.
The tax rate allocated to your income range is the percentage at which your income will be taxed by the IRS; 10% tax rate being for the lowest income earners with low taxable income and 37% tax rate for the highest income earners with higher taxable income.
For example, Mr. Fred is married and files tax returns jointly with his wife. If after necessary adjustments, their taxable income minus deduction is $180,000, then it means Mr. and Mrs. Fred will fall into the 4th tax bracket with their taxable income ranging between $171,051 – $326,600. This income range has a tax rate of 24% and based on this tax bracket they fall in, they will be required to pay $29,211, plus 24% of the excess over $171,050 ($180, 000 – $171, 050 = $8,950) as their federal income tax in this year 2020.
However, if Mr. Fred is a single filer with the same income range of $180, 000 for the tax year 2020. He would fall into the 5th tax bracket of the single filers with a tax rate of 32% for an income range of $163,301 – $207,350. For his tax calculation, he will be required to pay $33,271.50, plus 32% of the excess over $163,300 ($180,000 – $163,300 = $16,700) as his tax for the year 2020.
It is necessary for taxpayers to be aware of any current reviews to tax brackets or tax rates per year made available on the IRS website, so as not to make mistakes in the calculation of their taxes. Tax brackets usually are changed and adjusted yearly by the internal revenue service (IRS) due to inflation, therefore, one has to be aware of the current tax rate and tax bracket before calculating taxes owed on the income they have received.
The details of current tax brackets and tax rates are always made available on the IRS website for easy access. However, to get an accurate calculation of tax rate based on your tax bracket, it is available to use an online tax calculator to get the correct figure without risking a mathematical error.
Benefits of tax brackets
The provision tax brackets by the IRS ensures fairness in paying of tax by different individuals with varying taxable income amounts instead of a tax system where everyone is taxed at a flat tax rate irrespective of income or financial status. Due to this, every citizen and the income they earn will be able to contribute their own fair quota to the revenue of the nation without being unfairly charged too high or too low.
The major problem associated with tax brackets, however, is that due to the high tax rate on high-income earners, most of these individuals will usually look for ways to avoid paying such a large amount as taxes. This will eventually lead to tax avoidance which deprives the government of the needed revenue of tax payments.
The IRS made tax brackets available in order to bring fairness into tax payment by the idiosyncratic taxation of various taxpayers that fall into various income range categories. Due to the availability of tax brackets, there are different tax rates by which the tax of various taxpayers is determined. The higher the income earned, the higher the tax rate allocated.
This allows the rich to be able to pay sufficient tax to the government and still have enough to live on comfortably, and also allows the poor to live without the burden of tax debts due to high tax rates. It is however advisable that every taxpayer finds out his/her tax bracket to make the calculation to taxes much easier. The current tax brackets and tax rates can be easily assessed on the IRS official website.
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