How Do Tax Brackets Work?

Ever been confused by how tax brackets work in a progressive tax system? They may seem complicated, but once you understand how tax brackets work, you’ll see that they sound way more confusing than they actually are.

What’s a progressive tax system?

In a progressive tax system, you pay a higher tax percentage as you make more money—however, that higher percentage doesn’t apply to all of your taxable income.

The higher tax rates only apply to a set range of your income, so the percentage of tax you owe on a range of income is called a marginal tax rate (the tax rate only applies to the income within its margins). And what are those ranges called, you may ask? “Tax brackets.” We’ve come full circle!

Low income brackets are taxed at lower tax rates, and as the income amount increases, so do the bracket percentages.

How are marginal tax rates applied to tax brackets?

First, tax brackets separate your income into ranges—let’s say your income covers three different tax brackets.

The three brackets will divide your income into three separate (but not equal) amounts. Then, the marginal tax rate for each bracket will only be applied to the income that falls inside that range.

What you’ll end up with, then, are three different tax rates: a low rate for the income in the low range, a higher rate for the income in the medium range, and an even higher rate for the income in the high range.

Only the amount of money that covers the range of a bracket will be taxed at the rate in that bracket. This is why you’ll hear people say that a taxpayer’s effective (average) tax rate is less than their marginal tax rate.

Are tax brackets the same for everyone?

The marginal tax rates are the same for everyone, but the income ranges each rate covers are different for each filing status.

For example, in 2020, the first $9,875 that a single taxpayer makes (the lowest income range) is taxed at 10% (the marginal tax rate). However, if you’re married filing jointly, the 10% marginal tax rate applies to your first $19,750. The lowest income range is bigger, then, for those with the married filing jointly status.

Do I have to understand tax brackets to file my own taxes?

While it’s good to have a basic understanding of how our progressive tax system works, you don’t even need to look at the tax brackets when you file online with 1040.com. Instead, we automatically calculate your taxable income, identify the brackets, and apply the appropriate tax rates—no math needed on your end!

If you’d like to get a better understanding of how taxes will apply to you this year, there’s a way to do that without the math, too: Just use our handy Tax Calculator. It’ll estimate your taxes owed or tell you an estimate of your refund, and all you’ll have to do is provide estimates of your income, deductions, and other financial factors. We’ll do the math!