How Income Tax Brackets Work: 3 Things You Need to Know to Avoid Losing Money

income tax brackets

It’s kind of a running joke that we have a complicated tax system here in the U.S.

Except it’s not really a joke. We actually do have a complex tax system. In fact, our tax code is more than 2,500 pages, give or take a few hundred pages.

Many American taxpayers also struggle with figuring out how our marginal income tax brackets work, which is very important when you file your taxes.

That’s because understanding the basics of tax brackets set by the Internal Revenue Service (IRS) can help you make the most of your financial situation and reduce your tax liability.

Here’s what you need to know when it comes to federal income tax brackets.

1. You don’t pay income tax on all your income

Let’s start with the good news, which is you don’t pay taxes on all your income. So before you are sorted into a tax bracket, you must first figure out your taxable income. This is usually less than your total income.

We all get certain deductions that reduce the amount of income we are taxed on. For example, many of us have retirement accounts. Our contributions to retirement accounts reduce our income before we even get to tax time.

Some of the most common tax deductions people take include:

There are many other tax deductions as well. And there’s a standard deduction that you can take if you don’t have enough deductions to itemize.

As you work through your tax return, you’ll notice you have chances to reduce the amount of income that you are taxed on.

However, you don’t have to worry about income tax brackets until you’ve figured out all of your deductions and enter your taxable income on Line 43 of your Form 1040.

2. Filing status matters

Remember, your tax bracket depends on your filing status as well as your taxable income.

For instance, someone who makes $45,000 as a single person is in a higher tax bracket than a married couple whose combined income is $45,000.

What’s more, your filing status is based on your marital situation as of December 31. So even if you were single all year and you married on December 30, you would be considered married the entire year for tax purposes.

That’s why it’s a good idea to understand what each of the following five filing statuses means before you look at income tax brackets.


When you file single, it means that you are not married. At all. So there should be no record of you having a spouse for that tax year.

Married filing jointly

When you’re married, you have the option of filing your taxes together or separately. If you choose to file jointly, you pool your income and you take your deductions together.

Filing jointly also provides you with a tax advantage if one of you makes significantly more than the other. However, high-income couples who each make similar amounts might not benefit from filing jointly.

Married filing separately

You also have the option to file separately as a married couple.

In this case, you need to make sure you keep good records. That’s because the federal income tax brackets are different when you file separately than they would be if you filed jointly. They are also different than if you file as single.

Qualifying widow(er)

Normally, the tax brackets for qualifying widower are the same as those married filing jointly.

However, you must also have a dependent child to qualify for this status. You can claim it for two years after the death of your spouse.

Head of household

The IRS expects you to be unmarried or considered unmarried for the purpose of filing your taxes to claim this status.

You must have a qualifying person living with you for at least half the year (except for a school absence) and you must bear more than half the cost of keeping a home.

Filing head of household comes with its own set of tax brackets from the other statuses.

If you aren’t sure about your filing status, check the IRS website or consult a tax professional.

3. How income tax brackets work

Now that you know your taxable income and your filing status, you can finally see what you owe based on your tax bracket.

Tax brackets are named based on a percentage of your income. However, unless you are in the very bottom tax bracket, the 10 percent bracket, you don’t pay the percentage named on your entire income.

This is what makes tax brackets a little confusing. If you are in the top tax bracket, the 39.6 percent bracket, you aren’t actually paying 39.6 percent of your total taxable income. Instead, you pay the percentage based on an excess of the previous tax bracket.

Let’s say you are single and your taxable income is $55,000, putting you in the 25 percent bracket. If you paid a flat 25 percent on the total amount, you would owe $13,750. But that’s not how federal income tax brackets work.

Instead, this is how your tax liability would be figured:

  • 10 percent on the first $9,275 = $927.50
  • 15 percent on the amount between $9,276 and $37,650 = $4,256.10
  • 25 percent on the amount you make at $37,651 and above = $4,337.25

Add those figures up and your tax bill is actually $9,520.85.

Of course, this example uses 2016 tax brackets. The IRS updates tax brackets each year based on inflation. Make sure you check federal income tax brackets each year to stay on top of them.

2016 income tax brackets

If you’re preparing your taxes for the 2016 tax year (which are due April 15, 2017), here are the tax brackets you need to be aware of.

2016 income tax brackets

2017 income tax brackets

Looking ahead to the next tax year can help you plan your future finances as well. Do you see any differences within your current tax bracket for next year?

2017 income tax brackets
At the end of the day, make sure you pay close attention to different deductions that can help you stay within a specific tax bracket. Otherwise, you could be facing bigger tax bills in the near future.

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Published in Income, Taxes