What is the structure of the u.s. income tax system?

There are seven tax brackets for most ordinary income for the 2021 tax year: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.

Your tax bracket depends on your taxable income and your filing status: single, married filing jointly or qualifying widow(er), married filing separately and head of household. Generally, as you move up the pay scale, you also move up the tax scale.

The IRS started accepting taxpayers’ returns for this year’s tax season back in January. Most Americans have until April 18 to file, though they can request a six-month extension to Oct. 17.

The IRS on Nov. 10 announced new tax brackets for the 2022 tax year, for taxes you’ll file in April 2023, or October 2023 if you file an extension. There are seven tax brackets for most ordinary income for the 2022 tax year: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.”

Learn about other changes to this year’s tax season that may impact your filing in our new video series.

Tax brackets are not as intuitive as they seem because most taxpayers have to look at more than one bracket to know their effective tax rate.

Instead of looking at what tax bracket you fall in based on your income, determine how many individual tax brackets you overlap based on your gross income.

Figuring that out is easier in practice:

• Example one: Say you’re a single individual who earned $40,000 of taxable income in the 2021 tax year. Technically, you’d be aligned in the 12 percent tax bracket, but your income wouldn’t be levied a 12 percent rate across the board. Instead, you would follow the tax bracket up on the scale, paying 10 percent on the first $9,950 of your income and then 12 percent on the next chunk of your income between $9,951 and $40,525. Because you don’t make above $40,525, none of your income would be hit at the 22 percent rate.

That often amounts into Americans being charged a rate that’s smaller than their individual federal income tax bracket, known as their effective tax rate.

• Example two: Say you’re a single individual in 2021 who earned $70,000 of taxable income. You would pay 10 percent on the first $9,950 of your earnings ($995); then 12 percent on the chunk of earnings from $9,951 to $40,525 ($3,669), then 22 percent on the remaining income ($6,484.50)
• Your total tax bill would be $11,148.50. Divide that by your earnings of $70,000 and you get an effective tax rate of roughly 16 percent, which is lower than the 22 percent bracket you’re in.

The brackets above show the tax rates for 2021 and 2022. The brackets are adjusted each year for inflation.

Marginal tax rate definition and example

Another way of describing the U.S. tax system is by saying that most Americans are charged a marginal tax rate. That’s because as income rises, it is taxed at a higher rate. In other words, the last dollar that an American earns is taxed more than the first dollar. This is what’s known as a progressive tax system.

The technical definition of a marginal tax rate would be the rate that each individual taxpayer pays on their additional dollars of income.

Americans have two main ways to get into a lower tax bracket: tax credits and tax deductions.

Tax credits are a dollar-for-dollar reduction in your income tax bill. If you have a $2,000 tax bill but are eligible for $500 in tax credits, your bill drops to $1,500. Tax credits can save you more in taxes than deductions, and Americans can qualify for a variety of different credits.

The federal government gives tax credits for the cost of buying solar panels for your house and to offset the cost of adopting a child. Americans can also use education tax credits, tax credits for the cost of child care and dependent care and tax credits for having children, to name a few. Many states also offer tax credits.

While tax credits reduce your actual tax bill, tax deductions reduce the amount of your income that is taxable. If you have enough deductions to exceed the standard deduction for your filing status, you can itemize those expenses to lower your taxable income. For example, if your medical expenses exceed 7.5 percent of your adjusted gross income in 2021, you can claim those and lower your taxable income.

Tax brackets from previous years:

Essential tax reading:

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The federal individual income tax has seven tax rates ranging from 10 percent to 37 percent (table 1). The rates apply to taxable income—adjusted gross income minus either the standard deduction or allowable itemized deductions. Income up to the standard deduction (or itemized deductions) is thus taxed at a zero rate.

Federal income tax rates are progressive: As taxable income increases, it is taxed at higher rates. Different tax rates are levied on income in different ranges (or brackets) depending on the taxpayer’s filing status. In 2020 the top tax rate (37 percent) applies to taxable income over $518,400 for single filers and over $622,050 for married couples filing jointly. Additional tax schedules and rates apply to taxpayers who file as heads of household and to married individuals filing separate returns. A separate schedule of tax rates applies to capital gains and dividends. Tax brackets are adjusted annually for inflation.

BASICS OF PROGRESSIVE INCOME TAXATION

Each tax rate applies only to income in a specific tax bracket. Thus, if a taxpayer earns enough to reach a new bracket with a higher tax rate, his or her total income is not taxed at that rate, just the income in that bracket. Even a taxpayer in the top bracket has some portion of income taxed at the lower rates in the tax schedule. For example, a single filer with $60,000 in taxable income falls into the 22 percent bracket but does not pay tax of $13,200 (22 percent of $60,000). Instead, he or she pays 10 percent of $9,875 plus 12 percent of $30,250 ($40,125 - $9,875) plus 22 percent of $19,875 ($60,000 - $40,125) for a total of $8,990.

All tax brackets for married taxpayers are twice the size of those for singles, except for the penultimate bracket. This can cause a “marriage penalty” for some taxpayers in the highest tax bracket, as some couples pay more tax filing a joint return than they would if each spouse could file as a single person. Conversely, because most tax brackets for married couples are twice the size of those for singles, many married couples enjoy a “marriage bonus,” paying less in tax by filing jointly than they would if each partner filed as a single person.

HISTORY OF FEDERAL INCOME TAX BRACKETS AND RATES

Over the 100-plus year history of the modern federal income tax (short-lived income taxes existed before Congress ratified the 16th Amendment in 1913), the number of brackets and rates have changed dramatically and frequently. The federal income tax began with seven brackets but that number exploded to more than 50 by 1920 (figure 1). From then until the late 1970s, there were never fewer than 20 brackets. The last major federal tax reform, the Tax Reform Act of 1986, reduced the number of brackets from 16 to two, but that number has crept up to the current seven over the last three decades.

The top marginal federal income tax rate has varied widely over time (figure 2). The top rate was 91 percent in the early 1960s before the Kennedy/Johnson tax cut dropped it to 70 percent. In 1981, the first Reagan tax cut further reduced the top rate to 50 percent, and the 1986 tax reform brought it down to 28 percent. Subsequent legislation increased it to 31 percent in 1991 and to 39.6 percent in 1993. George W. Bush’s tax cuts lowered the top rate to 35 percent, but it reverted to 39.6 percent when the American Taxpayer Relief Act of 2012 let the reduced top rate expire as scheduled. The Tax Cuts and Jobs Act lowered the top rate to 37 percent starting in 2018.

Updated May 2020