Understanding Tax Brackets, With Examples and Their Pros and Cons

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Understanding Tax Brackets, With Examples and Their Pros and Cons
2022 Marginal Tax Rates by Income and Tax Filing Status
Tax RateIncome Tax Bracket for Single FilersIncome Tax Bracket for Married Couples Filing JointlyIncome Tax Bracket for Married Couples Filing SeparatelyIncome Tax Bracket for Head of Household Filers
10%$10,275 or less$20,550 or less$10,275 or less$14,650 or less
12%$10,276 to $41,775$20,551 to $83,550$10,276 to $41,775$14,651 to $55,900
22%$41,776 to $89,075$83,551 to $178,150$41,776 to $89,075$55,901 to $89,050
24%$89,076 to $170,050$178,151 to $340,100$89,076 to $170,050$89,051 to $170,050
32%$170,051 to $215,950$340,101 to $431,900$170,051 to $215,950$170,051 to $215,950
35%$215,951 to $539,900$431,901 to $647,850$215,951 to $323,925$215,951 to $539,900
37%Over $539,900Over $647,850Over $323,925Over $539,900

Example of Tax Brackets

Based on 2022 tax rates, this is an example of marginal tax rates for a single filer.

  • Single filers with taxable income of less than $10,275 are subject to a 10% income tax rate (the lowest bracket).
  • Single filers earning more than $10,275 will pay 10% tax on the first $10,275, while earnings beyond the first bracket and up to $41,775 will be taxed at a 12% rate (the next bracket).
  • Earnings between $41,776 and $89,075 are taxed at a rate of 22%, the third bracket.

Consider the following tax liability in 2022 for a single filer with taxable income of $50,000:

  • The first $10,275 is subject to a 10% tax: $10,275 × 0.10 = $1,027.50
  • The difference between $10,276 and $41,775, or $31,499, is taxed at 12%: $31,499 0.12 = $3,779.88
  • Finally, the remaining $8,225 of the $50,000 revenue is taxed at 22%: $8,225 0.22 = $1,809.50

Add the taxes owed in each of the brackets:

  • $1,027.50 + $3,779.88 + $1,809.50 = $6,616.88 in taxes

The effective tax rate for a person is around 13% of income:

  • Total taxes divided by yearly earnings: $6,616.88 $50,000 = 0.13
  • To convert to a percentage, multiply 0.13 by 100, which gets 13%.

Pros and Cons of Tax Brackets

Tax brackets, and the progressive tax system they generate, contrast with a flat tax structure, in which all persons, regardless of income level, are taxed at the same rate.

Pros
  • Individuals with higher incomes are better able to pay income taxes while maintaining a comfortable level of life.

  • Individuals with little income pay less, providing them with more money to maintain themselves.

  • Tax deductions and credits provide tax relief to high-income persons while rewarding beneficial behavior such as charitable giving.

  Retirement Accounts Abroad
Cons
  • People who are wealthy end up paying a disproportionate amount of taxes.

  • Brackets cause the rich to concentrate on discovering tax loopholes, resulting in many people underpaying their taxes and depriving the government of money.

  • Progressive taxation leads to reduced personal savings.

Positives

Individuals with high salaries, according to proponents of tax brackets and progressive tax systems, are better able to pay income taxes while maintaining a reasonably good quality of life. Individuals with low incomes who struggle to satisfy their fundamental requirements, on the other hand, should face less taxes.

Proponents argue that it is only fair that rich taxpayers pay more in taxes than the poor and middle class, thereby countering income distribution inequalities. As a result, the progressive taxation system is “progressive” in both senses: it grows in stages and is geared to assist lower-income taxpayers.

Supporters argue that by allowing taxpayers to decrease their tax burden via modifications such as tax deductions or tax credits for outlays such as charitable donations, this system may create larger revenues for governments while remaining fair.

Taxpayers’ increased income may then be reinvested back into the economy. Furthermore, tax brackets have an automatic stabilizing impact on a person’s after-tax income, since a fall in money is offset by a decrease in the tax rate, resulting in a less significant loss for the individual.

Negatives

Opponents of tax brackets and progressive tax schedules contend that under the law, everyone is equal regardless of wealth or economic standing, and that there should be no discrimination between rich and poor.

They also point out that progressive taxation may result in a significant disparity between the amount of tax paid by rich individuals and the quantity of government representation they obtain. Some argue that people have just one vote per person, regardless of their personal or national tax proportion.

Opponents also argue that higher taxation at higher income levels can (and often does) result in the wealthy spending money to exploit tax law loopholes and find creative ways to shelter earnings and assets, often resulting in them paying less in taxes than the less well-off, depriving the government of revenue. For example, several American corporations have shifted their headquarters overseas in order to avoid or cut their corporate taxes in the United States.

  Bilateral Tax Agreement

History of Federal Tax Brackets

Tax brackets have been in the United States tax law since the very first income tax was enacted in 1861, when the Union government issued the Revenue Act of 1861 to assist pay its fight against the Confederacy. In 1862, the second revenue legislation created the first two tax brackets: 3% for yearly earnings between $600 and $10,000, and 5% for incomes beyond $10,000. The original four filing statuses were single, married filing jointly, married filing separately, and head of household, with rates remaining constant regardless of tax status.

The income tax was repealed by Congress in 1872. It did not resurface until the 16th Amendment to the United States Constitution was passed in 1913, establishing Congress’ ability to impose a federal income tax. The same year, Congress established a 1% income tax on individuals earning more than $3,000 per year and couples earning more than $4,000 per year, with a tiered surtax of 1% to 7% on earnings of $20,000 and above.

The number of tax brackets has changed throughout time. When the federal income tax was first implemented in 1913, there were seven tax brackets. In 1918, the number of brackets increased to 56, ranging from 6% to 77%. In 1944, the highest rate was 91%. However, then-President Lyndon B. Johnson reduced it to 70% in 1964. In 1981, then-President Ronald Reagan reduced the highest rate to 50%.

Then, under the Tax Reform Act of 1986, brackets were streamlined and rates were cut, resulting in just two brackets in 1988: 15% and 28%. This system was in use until 1991, when a third bracket of 31% was introduced. Since then, more brackets have been added, bringing us full circle and back to seven brackets.

State Tax Brackets

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not have an income tax. Earned wages are not taxed in New Hampshire, but investment income and interest are. However, those taxes will be phased away beginning in 2023, raising the number of states with no income tax to nine by 2027.

Colorado (4.55%), Illinois (4.95%), Indiana (3.23%), Kentucky (5.0%), Massachusetts (5.0%), Michigan (4.25%), North Carolina (5.25%), Pennsylvania (3.07%), and Utah (4.95%) had flat rate structures in 2022, with a single rate applied to a resident’s income.

Other states’ tax brackets range from three to nine (in California, Iowa, and Missouri), and even twelve (in Hawaii).The marginal tax rates in these categories also differ significantly. California has the highest, with a maximum of 12.3%.

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State income tax policies may or may not be consistent with federal requirements. Some jurisdictions, for example, let people to utilize the federal personal exemption and standard deduction amounts to calculate state income tax. Others, on the other hand, have their own exemption and standard deduction levels.

How to Find Your Own Tax Bracket

There are various internet resources available to help you determine your exact federal income tax bracket. The IRS makes a range of information accessible, including yearly tax tables with very specific tax filing statuses in increments of $50 of taxable income up to $100,000.

Other websites provide tax bracket calculators, which will perform the work for you if you know your filing status and taxable income. Because your tax bracket might vary from year to year due to inflation adjustments and changes in your income and status, it’s important to check on an annual basis.

What are the federal tax brackets for 2022?

Individual single taxpayers with earnings of more than $539,900 (or more than $647,850 for married couples filing jointly) pay the highest tax rate of 37%. The other rates are as follows:

  • For earnings over $215,950 ($431,900 for married couples filing jointly), the tax rate is 35%.
  • 32% on earnings of more beyond $170,050 ($340,100 for married couples filing jointly)
  • For earnings of more than $89,075 ($178,150 for married couples filing jointly), the tax rate is 24%.
  • 22% on earnings in excess of $41,775 ($83,550 for married couples filing jointly).
  • 12% on earnings in excess of $10,275 ($20,550 for married couples filing jointly)

For the 2022 tax year, the lowest rate is 10% for singles with earnings of $10,275 or less ($20,550 for married couples filing jointly).

How much can I earn before I pay 40% tax?

For 2022, the wealthiest earners in the United States pay a federal tax rate of 37% on any income over $539,900 (single filers) and $647,850 (married couples filing jointly).

How do I calculate my tax bracket?

To figure out which tax bracket your earnings will fall into, utilize the tables above or visit the Internal Revenue Service (IRS) website, which gives very specific tax filing statuses in increments of $50 of taxable income up to $100,000.

The Bottom Line

In the United States, the federal tax system is progressive. Lower-income taxpayers pay lower tax rates than higher-income taxpayers. There will be seven federal tax bands in 2022, with rates ranging from 10% to 37%.

Unless your taxable income puts you in the lowest tax band, you are taxed at numerous rates as your income increases; your full income is not subject to the rate designated for your income level.

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