KEY POINTS RELATED TO THE FEDERAL TAX BRACKETS

• There are currently seven federal tax brackets in the United States, with rates ranging from 10% to 37%.
• The U.S. tax system is progressive, with people in lower brackets taxed at lower rates and those in higher brackets taxed at higher ones.
• Unless your total income fits in just the lowest tax bracket, you are charged at multiple rates, according to the additional brackets into which your income flows.
• You are not simply taxed at the rate of the bracket into which your total income falls; therefore, you effectively pay less than that rate.
• Typically, the IRS adjusts tax brackets for inflation every year.
• Your "ACTUAL" tax bracket is based on your Adjusted Gross Income (AGI). So the lower your Adjusted Gross Income (AGI) is, the less you will be taxed.
• The way to lower your AGI is to have more tax deductions or DEFER some of your income.

Example of FEDERAL Tax Brackets:

Below is an example of marginal tax rates for a single filer based on 2022 tax rates.

• Single filers with less than $10,275 in taxable income are subject to a 10% income tax rate (the lowest bracket).
• Single filers who earn more than $10,275 will have the first $10,275 taxed at 10%, but earnings beyond the first bracket and up to $41,775 will be taxed at a 12% rate (the next bracket).
• Earnings from $41,776 to $89,075 are taxed at 22%, the third bracket.4

Consider the following tax responsibility for a single filer with a taxable income of $50,000 in 2022:

• The first $10,275 is taxed at 10%: $10,275 × 0.10 = $1,027.50
• Then $10,276 to $41,775, or $31,499, is taxed at 12%: $31,499 × 0.12 = $3,779.88
• Finally, the remaining $8,225 (what’s left of the $50,000 income) is taxed at 22%: $8,225 × 0.22 = $1,809.50

Add the taxes owed in each of the brackets:

• Total taxes: $1,027.50 + $3,779.88 + $1,809.50 = $6,616.88

The individual’s effective tax rate is approximately 13% of income:

• Divide total taxes by annual earnings: $6,616.88 ÷ $50,000 = 0.13
• Multiply 0.13 by 100 to convert to a percentage, which is 13%

Pros and Cons of Tax Brackets:

Tax brackets—and the progressive tax system that they create—contrast with a flat tax structure, in which all individuals are taxed at the same rate, regardless of their income levels.

Pros

• Higher-income individuals are more able to pay income taxes and keep a good living standard.
• Low-income individuals pay less, leaving them more to support themselves.
• Tax deductions and credits give high-income individuals tax relief, while rewarding useful behavior, such as donating to charity.

Cons

• Wealthy people end up paying a disproportionate amount of taxes.
• Brackets make the wealthy focus on finding tax loopholes that result in many underpaying their taxes, depriving the government of revenue.
• Progressive taxation leads to reduced personal savings.