In our tax system, we have 7 different tax rates or brackets. When someone talks about the bracket that they are in, they are talking about the rate that they pay on the highest dollar of income. The tax bracket tells the consumer, what percentage they would have to pay on the next dollar of income. Our tax system is a progressive system. The more money that you make, the higher the percentage of tax or the tax bracket. I guess the government feels that the higher income earners in our society can afford to pay a higher amount of tax.
Take a look at the 2015 1040 form. You list your income in lines 7-21 and the total on line 22 is your total income. Lines 23-35 are tax credits that will reduce your total income if you are eligible. These lines are totaled on line 36 and you take total income less line 36 and the result is adjusted gross income on line 37. From this, you subtract out your deduction, either standard or itemized and your deductions, which is $4,000 times the number of people in your family you are able to deduct. The result is your taxable income. This is the amount you pay taxes on.
Using the chart below, I am going to go over two examples of how the progressive tax bracket system would figure taxes.
First example, single taxpayer income of $50,000. In this example, the taxpayer would owe 10% up to $9225, or $922.50. In the next bracket, the taxpayer would owe 15% between $37,450 and $9226, or $4233.75. In the next bracket, the taxpayer would owe 25% between 50,000 and $37451 or $3137.50. Total would be 922.50+4233.75+3137.50 or $8293.75. The highest tax bracket is 25% but the effective tax rate is 16.5%.
Second example, married taxpayers with income of $100,000. In this example, the taxpayers would owe 10% up to $18,450, or $1845. In the next bracket, the taxpayers would owe 15% between $74,900 and $18,450, or $8467.50. In the next bracket, the taxpayer would owe 25% between 100,000 and $74,900 or 6275.00. Total would be 1845+8467.50+6275 or $16,587.50. The highest tax bracket is 25% but the effective tax rate is 16.6%..
Just think, using the tax bracket you are in can help you make decisions. You can figure out that any overtime you make, you will be paying 25% in federal income tax. You can also know that any amount that you increase your itemized deduction will save you 25% of the increase in taxes. This also could go for a retirement contribution.
Federal Income Tax Brackets, 2015 Tax Year
| Tax rate | Single filers | Married filing jointly or qualifying widow(er) | Married filing separately | Head of household |
|---|---|---|---|---|
| 10% | Up to $9,225 | Up to $18,450 | Up to $9,225 | Up to $13,150 |
| 15% | $9,226 to $37,450 | $18,451 to $74,900 | $9,226 to $37,450 | $13,151 to $50,200 |
| 25% | $37,451 to $90,750 | $74,901 to $151,200 | $37,451 to $75,600 | $50,201 to $129,600 |
| 28% | $90,751 to $189,300 | $151,201 to $230,450 | $75,601 to $115,225 | $129,601 to $209,850 |
| 33% | $189,301 to $411,500 | $230,451 to $411,500 | $115,226 to $205,750 | $209,851 to $411,500 |
| 35% | $411,501 to $413,200 | $411,501 to $464,850 | $205,751 to $232,425 | $411,501 to $439,000 |
| 39.6% | $413,201 or more | $464,851 or more | $232,426 or more | $439,001 or more |
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