us-tax-brackets-1600780077044.jpg
Source: istock

What Are the U.S. Tax Brackets and How Do They Work?

By

Updated

What are the tax brackets in the U.S.? A 2013 YouGov poll found that roughly half of Americans don’t know how the country’s marginal tax rates actually work. They think that once a person hits a certain bracket, the income is taxed at a higher rate.

Article continues below advertisement

However, the idea that income is taxed at one rate is a misconception, as The Washington Post pointed out with a handy visual guide. Instead, tax brackets apply to different portions of your income. In 2020, the first $9,784 that a single filer earns will be taxed at 10 percent. For example, the rest of the income will be taxed at 12 percent. Any income above the next highest bracket will be taxed at the next highest bracket.

According to Investopedia, “The first dollar earned will be taxed at the rate for the lowest tax bracket, the last dollar earned will be taxed at the rate of the highest bracket for that total income, and all the money in between is taxed at the rate for the range into which it falls.”

Article continues below advertisement

What are the U.S. tax brackets in 2020?

irs-1040-irs-tax-return-form-1600714091392.jpg
Source: iStock

For single individuals in the 2020 tax year, the tax rate is 10 percent for taxable income over $0, 12 percent for taxable income over $9,875, 22 percent for taxable income over $40,125, 24 percent for taxable income over $85,525, 32 percent for taxable income over $163,300, 35 percent for taxable income over $207,350, and 37 percent for taxable income over $518,400, according to the Tax Foundation.

For married individuals filing jointly, the tax rate is 10 percent for taxable income over $0, 12 percent for taxable income over $19,750, 22 percent for taxable income over $80,250, 24 percent for taxable income over $171,050, 32 percent for taxable income over $326,600, 35 percent for taxable income over $414,700, and 37 percent for taxable income over $622,050.

Article continues below advertisement

For heads of household, the tax rate is 10 percent for taxable income over $0, 12 percent for taxable income over $14,100, 22 percent for taxable income over $53,700, 24 percent for taxable income over $85,500, 32 percent for taxable income over $163,300, 35 percent for taxable income over $207,350, and 37 percent for taxable income over $518,400.

Article continues below advertisement

Are tax brackets based on gross income?

Tax brackets are based on gross income with adjustments and deductions. To start the calculations, U.S. News & World Report said to find your gross income by totaling all of your income — salary, side gig paychecks, payments from rental properties, and so on—except any income that the tax code considers an exclusion.

“Gross income is pretty much everything, and it’s defined in the law as income from all sources unless there’s an exception in the tax code,” Chris Raulston, a wealth strategist at Raymond James, explained on the site.

Article continues below advertisement
how-do-us-tax-brackets-work-1600780219045.jpg
Source: istock

Once you have your gross income, subtract the tax adjustments, like student loan interest and IRA contributions. The amount is your adjusted gross income.

Article continues below advertisement

Then you will need to subtract the tax deductions. Either take the standard deduction — which for the 2020 tax year is $12,400 for single filers and married couples filing separately, $18,650 for heads of household, and $24,800 for married couples filing jointly — or itemize your deductions if you think the deduction total will be higher than the standard deduction.

Now that you calculated your taxable income, you can see how the marginal tax rates impact the various portions of your income.

Advertisement

More From Market Realist