Federal income tax rates are as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Due to the Tax Cuts and Jobs Act of 2017, these rates will not change until 2025. Learn about your federal income tax bracket or brackets, how tax rates operate, and ways to reduce your tax liability in advance of tax season.
Your income is typically taxed at multiple rates, so you may pay multiple tax rates on different parts of your income. The amount you pay also depends on your filing status (married, single, etc.), and your income isn’t typically taxed at a single rate as is commonly believed.
The operation of tax rates and brackets
1. Describe income tax brackets.
Because the United States has a progressive tax structure, those with higher incomes pay greater federal taxes, while those with lower incomes pay fewer taxes.
Your taxable income is divided into tax brackets by the government, which determines how much tax you owe. Each tax bracket is charged at a different tax rate. The range of tax rates is 10% to 37%.
The good thing about tax brackets is that, in most cases, you won’t pay that tax rate on your total income regardless of the bracket or brackets you’re in. Only a percentage of your income is subject to the highest tax rate you pay.
What is a marginal tax rate?
The tax rate paid on the final dollar of taxable income is known as the marginal tax rate, and it usually corresponds to your highest tax band.
Parts of your income would be subject to 10% and 12% taxes in 2024 if you are a single filer with $35,000 in taxable income. You would also pay 12% on any additional $1 that increased your taxable income.
How to reduce taxes owed
Two common ways of reducing your tax bill are credits and deductions.
Tax credits can reduce your tax bill on a dollar-for-dollar basis; they don’t affect what bracket you’re in.
Tax deductions, on the other hand, reduce how much of your income is subject to taxes. Generally, deductions lower your taxable income by the percentage of your highest federal income tax bracket. So, if you fall into the 22% tax bracket, a $1,000 deduction could save you $220.
Alternative Minimum Tax (AMT)
Unfortunately, the exemption amount was not indexed for inflation, so until recently, the Alternative Minimum Tax had become the middle class’s worst enemy. It turned out that the majority of AMT taxpayers were middle-class households. The Trump Administration expanded the exemptions and the Obama Administration adjusted them for inflation, both of which significantly lessened the effect of the AMT on the middle class. The potential impact of the Biden Administration’s proposed tax reforms on the Alternative Minimum Tax is still unknown.