Your Tax Bracket
By Kaye A. Thomas
Current as of November 20, 2013
Knowing your tax bracket and understanding its significance can help with your tax planning.
Note: This page provides an explanation of tax brackets. If you’re just looking for the numbers, they’re available here:
- 2014 Tax Rate Schedules (returns filed in 2015)
- 2013 Tax Rate Schedules (returns filed in 2014) (as changed by the America Taxpayer Relief Act of 2012)
- 2012 Tax Rate Schedules (returns filed in 2013)
Your tax bracket can be used to estimate the amount of additional tax you’ll pay if your income increases — or the amount you’ll save if you can claim a deduction. If you’re in the 25% tax bracket you can expect to pay about $250 additional tax if you have $1,000 additional taxable income. In the 15% tax bracket, a $200 deduction will save you about $30. Knowing your tax bracket can help you make better tax planning decisions.
Where tax brackets come from
Congress establishes tax rates that apply to different levels of taxable income. Current law provides rates from 10% to 39.6%. The higher your income, the higher your tax rate.
The current rates for most taxpayers were established in 2001 but set to expire, initially at the end of 2010, and then at the end of 2012. The American Taxpayer Relief Act of 2012 (the “fiscal cliff law”) made the lower tax rates permanent while allowing the top rate to revert from 35% to its earlier level of 39.6% for high-income taxpayers.
The range of income where you stay at any particular rate is known as a tax bracket. For a single person in 2014 the rate on taxable income between $36,900 and $89,350 is 25%, so those numbers establish the 25% bracket. If you’re single and your taxable income is between those two numbers, your tax bracket is 25%.
Here are some of the most frequently asked questions about tax brackets.
- Is my tax bracket established by the amount I earn on the job?
Some people have in mind the general notion that their tax bracket depends on how much they earn as an employee and won’t be affected by other kinds of income. In reality your tax bracket depends on your taxable income, regardless of the source of that income. For example, you can move into a higher tax bracket because of increased interest income or a distribution from a pension plan — or even because of a decrease in your deductions.
- Will capital gain or dividend income push my other income into a higher tax bracket?
No, the tax rates apply first to your “ordinary income” (income from sources other than long-term capital gains or qualifying dividends) so these items that are taxed at special rates won’t push your other income into a higher tax bracket.
- If my ordinary income puts me in the 15% tax bracket, can I receive an unlimited amount of long-term capital gain at the 0% rate?
No, the 0% rate applies only to the amount of long-term capital gain and dividend income needed to “fill up” the 15% tax bracket. For example, if your ordinary income is $4,000 below the figure that would put you in the 25% bracket and you have a $10,000 long-term capital gain, you’ll pay 0% on $4,000 of your capital gain and 15% on the rest.
- Will my overall tax go up sharply when my income reaches the point where I’m in the next tax bracket?
No, there’s no reason to be concerned about this possibility. When you reach a higher tax bracket, any additional income will be taxed at the higher rate, but the income required to reach that level is still taxed at the lower rates. For example, if your taxable income is just $100 above the limit on the 15% bracket, the last $100 dollars will fall in the 25% bracket and will cause your tax to increase by $25, but won’t affect the tax you pay on all your other income.
- Can I determine my tax bracket by looking at the withholding rate on my paystub?
No, withholding rates are based on averages, not specific tax brackets. For example, your withholding rate may be about 20%, even though there’s no tax bracket between 15% and 25%.
- Are tax brackets the same as marginal rates?
Not exactly. In some cases the added tax you pay when your income goes up isn’t the same as your tax bracket. That’s because the added income can cause you to lose some other tax benefit. For example, added income can mean smaller itemized deductions or a reduction in the amount you claim for your exemptions. You may find that $1,000 of added income causes your tax to go up by $292 even though you’re in the 28% bracket. Your tax bracket is just an approximation of the added tax. To be more precise, we would say you have an effective marginal rate of 29.2%. In most cases, the tax bracket is close enough to the effective marginal rate for purposes of tax planning.
Finding your tax bracket
Finding your tax bracket involves two steps. First, determine your taxable income for the relevant year. Then look that number up in the relevant tax rate schedule.
Tip: If you use tax software to prepare your returns, check to see if it will generate a report that includes information about your tax bracket.
Taxable income. You can find your taxable income for a previous year by looking at your tax return. It’s clearly labeled — but not very conspicuous. Just look for the words “taxable income.”
If you need to estimate your taxable income for a year in the future, usually the best way to start is to know your taxable income for the most recent year. Then make adjustments for changes you might anticipate: increases or decreases in income or deductions, and perhaps a change in filing status.
Tax rate schedules. Once you know your taxable income and filing status, you need to look it up in the appropriate tax rate schedule. This is not the same as the tax tables you use to look up your tax! Those tables give you dollar amounts but not tax rates. What you want is a schedule that tells you the tax rate as a percentage for your level of taxable income.
The IRS publishes tax rate schedules in the instructions for Form 1040, and also for 1040-ES (the form used to pay estimated tax) — but not in the instructions for Forms 1040A or 1040EZ. Current tax rate schedules for every filing status can be found in our Reference Room.
Here’s a sample tax rate schedule: the 2014 tax rate schedule for single filers.
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If you’re a single filer and your 2014 taxable income is $20,000, then you’re in the 15% tax bracket. With $50,000 of taxable income you would be in the 25% tax bracket.