In the United States people with higher taxable incomes pay higher federal income tax rates. That being said, let’s point out some information that helps clarify some items that easily confuse people.
- The government decides how much tax you owe by dividing your taxable income into brackets. Those brackets are each taxed at a corresponding tax rate. No matter which bracket you’re in, you won’t pay that tax rate on your entire income.
- Example A: For a single filer with $32,000 in taxable income. That puts you in the 12% tax bracket in 2018. However you don’t pay 12% on all $32,000. You pay only 10% on the first $9,525; you pay 12% on the rest.
- Example B: If you had $50,000 of taxable income, you’d pay 10% on that first $9,525 and 12% on the income between $9,526 and $38,700. And then you’d pay 22% on the rest, because some of your $50,000 of taxable income falls into the 22% tax bracket. The total bill would be about $6,900 — about 14% of your taxable income, even though you’re in the 22% bracket.
- This is ONLY for federal income taxes; your state might have different brackets, a flat income tax or even no income tax at all.
How can you get into a lower tax bracket and pay a lower federal income tax rate? Discover ways of reducing your tax bill wtih credits and deductions.
- Tax credits directly reduce the amount of tax you owe; they don’t affect what bracket you’re in.
- Tax deductions, on the other hand, reduce how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So if you fall into the 22% tax bracket, a $1,000 deduction saves you $220.