Everything you need to know about tax brackets: What are they, how do they work and examples

Tax brackets are an essential component of the progressive tax system used in many countries, including the United States. They determine the rate at which individuals or businesses are taxed based on their income.

Also known as tax rates or tax bands, tax brackets are specific income ranges that correspond to different tax rates. In a progressive tax system, as your income increases, your tax rate also increases. The goal is to distribute the tax burden more equitably, with those who earn more paying a higher percentage of their income in taxes.

How Do Tax Brackets Work?

Each tax bracket is associated with a specific tax rate, expressed as a percentage. These rates are set by the government and can vary based on your filing status (single, married, head of household, etc.) and the type of income (e.g., ordinary income, capital gains, dividends).

Determining how much tax to pay

To determine your tax liability, you first calculate your taxable income. This is done by subtracting deductions and exemptions from your total income.

Once your taxable income is determined, it is matched to the appropriate tax bracket. As your income increases and moves into higher tax brackets, you pay a higher percentage of your income in taxes on each additional dollar earned within that bracket.

It is important to note, and oft forgotten, that it is only the money you earn in each tax band that is taxed. For example, if you earned $45,000 and were single then only the $274 over the 22% income tax threshold would be taxed at that rate; everything else would be at lower rates.

The federal income tax brackets for 2023

The Tax Cuts and Jobs Act of 2017 set the federal tax brackets in the US until 2025.

These brackets represent the percentage of income that individuals within each bracket pay in federal income tax. State and local taxes can also apply, but they vary by location.