Everything You Need to Know About Tax Brackets for Filing in 2018

federal tax brackets

If you want to keep more of your money come tax time, knowing which tax bracket you’re in is key.

Your status and tax bracket affect more than just your tax bill in April. It can have significant implications for your student loans, as well. Knowing your federal income tax rate is essential to completing your taxes correctly and getting the deductions you deserve.

Here’s everything you need to know about the federal income tax rates for filing your taxes in 2018.

What are federal tax brackets?

The income brackets and tax rate can change every year. For the taxes you’ll file next year, in 2019, the tax structure and income brackets will change dramatically thanks to tax reform, so it’s a good idea to check the brackets each tax year to see where you fit in.

The IRS taxes different portions of your income at different rates depending on how much you make each year. If you have a higher income, you’ll pay a higher rate.

Every taxpayer falls into one of seven tax brackets, depending on your income:

  • 10%
  • 15%
  • 25%
  • 28%
  • 33%
  • 35%
  • 39.6%

Federal income tax rates for 2018 filing

In the fall of the tax year, the IRS releases annual inflation adjustments, particularly those that affect the tax brackets.

Here are the most recent brackets:

Tax Rate Single Married (joint)/Widow(er) Married (separate) Head of Household
10% $0-$9,325 $0-$18,650 $0-$9,325 $0-$13,350
15% $9,326-$37,950 $18,651-$75,900 $9,326-$37,950 $13,351-$50,800
25% $37,951-$91,900 $75,901-$153,100 $37,951-$76,550 $50,801-$131,200
28% $91,901-$191,650 $153,101-$233,350 $76,551-$116,675 $131,201-$212,500
33% $191,651-$416,700 $233,351-$416,700 $116,676-$208,350 $212,501-$416,700
35% $416,701-$418,400 $416,701-$470,700 $208,351-$235,350 $416,701-$444,550
39.6% $418,401+ $470,701+ $235,351+ $444,551+

How tax brackets work

The IRS doesn’t tax your income at one flat rate. Instead, you’ll be taxed at one rate up until the bracket limit, then any income after that is taxed according to the next bracket, and so on. The marginal rates only apply to slices of your income, rather than the whole chunk. The tax rate you pay on the last slice of your income is your tax bracket.

For example, if you made $10,000 and are single, you’d pay a 10% tax rate on $9,325 of your income. The remaining $675 would be taxed at the next bracket, 15%. Because you paid 15% on the last part of your income, that’s your tax bracket.

The progressive tax system means that everyone pays the same rates on the same income, but the rates get higher as your income increases over certain thresholds.

Thankfully, you don’t have to do the math on your own. Your tax preparation software or tax preparer will do that for you. If you want to figure out what your tax bracket is, you can also use the TurboTax bracket calculator to find it.

Federal tax brackets and financial aid

The federal tax rate can affect your financial aid as well. How you pay for school can change how much you pay in taxes each year.

Grants and scholarships

If you receive scholarships or grants, such as Pell Grants, they are considered tax-free income as long as you spend the money on essential expenses such as tuition, fees, and school supplies. The Pell Grant doesn’t boost your income or affect your income tax bracket.

However, many people use scholarships and grants for other education-related expenses, such as room and board. That’s completely acceptable, but if used that way, the Pell Grant is taxable as income. If you received thousands in aid, that could push you into a higher tax bracket, and you’ll owe more money at tax time.

Student loans

Because federal student loans are borrowed money that you have to pay back, the student loans you receive for the school year are not taxable as income, regardless of how you use them.

Work-study programs

If you are entered into a work-study program to offset your college costs, the IRS generally views your work as a regular part-time job, according to FinAid. That means any money you earn from a work-study job can be taxed as income and affect your federal income tax brackets.

Loan forgiveness

Your loans discharged through Public Service Loan Forgiveness (PSLF) are not taxable as income, so you don’t have to worry about your loans causing your tax bracket to change.

However, it’s very different for those who pursue income-driven repayment (IDR) plans and loan forgiveness. Under IDR plans, the government will discharge your loans after 20 to 25 years of making payments. But unlike PSLF, the amount that they discharge is taxable as income, which can result in a huge tax bill.

For example, if you took out the average student loan debt of $37,172, were single, and had an income of $20,000, you would be eligible for several IDR plans. If you chose Pay as You Earn (PAYE), you would make 240 payments before your loans would be discharged. Under PAYE, $34,063 would be forgiven.

Student loan forgiveness calculation

Image credit: Federal Student Aid

Having $34,063 in debt disappear overnight sounds amazing. But that means you will have a huge tax bill in April because that forgiven amount is now taxable income.

When added to your salary, you’ll have $54,063 in taxable income, pushing you from the 15% bracket to the 25% bracket. If you subtracted the standard deduction, that means you’ll owe $6,655 in income taxes. That would be more than six times what you’d owe if only your salary were taxable.

How deductions affect your federal income tax brackets

Before you get depressed because a higher tax bracket is taking more of your income, keep in mind that you can subtract deductions from your taxable income.

If you qualify for the student loan interest deduction, you can take off as much as $2,500 from your taxable income.

For example, if you’re single and make $38,000 and don’t have any deductions, you would be in the 25% federal tax bracket. However, if you claimed the full student loan interest deduction, you could deduct $2,500 from your taxable income. That means your taxable income would be just $35,500.

That lower income would put you in the 15% tax bracket instead of the 25% bracket. Deductions can dramatically reduce your tax bill, so keep an eye out for any you might qualify for.

Understanding your federal income tax rate

Although federal tax brackets can be confusing, knowing your tax rate will help you prepare for tax time. Understanding what counts as income, and what you can deduct, can change your bracket and lower your tax bill.

If you need help, choose a tax preparation software to better manage your taxes. That way, you get the biggest refund available to you.

Need to file your taxes?

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Turbo TaxFree version available. Starting at $34.95 for "Deluxe"Learn More
H&R Block TaxFree version available. Starting at $34.95 for "Deluxe"Learn More
TaxActFree version available. Starting at $15 for "Plus"Learn More
Esmart TaxStarting at $10.47 for "EZ"Learn More
ezTaxReturnStarting at $39.95 for State + Federal returnLearn More
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