Tax Brackets Explained

Taxes are a necessary evil that most people wish did not exist. Even though a lot lot people feel this way; they should understand that taxation is why we have roads, schools and important services that are offered by the federal, state and local governments.  Taxes are derived from the products we buy, the services we use, the items that businesses sell and from people who work.  As a matter of fact all employed individuals are required a certain amount of tax from their income.  The following information will explain the type of system that is used to tax working people within society.

There is an old saying that is related to taxation system in America and states: “The more you make, the more you take.”  This particular saying is reveals how the average person views the taxation system within this country.  However, this perception is wrong. America’s taxation system is not a flat percentage based form of taxation.  In other words the IRS does not place people into categories that are based off of percentages and have them pay their taxes according to the amount of their income. Instead, the American system of taxation is progressive.

What is a Progressive System for Taxation?

A progressive system operates on the principle that higher income people should pay more federal taxes than lower income people.  This might seem like the more that an individual makes, the more the government takes.  However, this is not the case.  Keep in mind that the progressive system makes paying taxes relative to the amount of money that an individual makes.  Just because a person makes $100,000 a year does not mean that they will have to pay 25% of their income.  The progressive system could have them paying 24% or lower on their income.  This depends on other variables such as dependents and exemptions which affects a person’s overall withheld tax rate on their income.

All about US Tax Brackets

Tax brackets are derived from the progressive tax system.  The IRS created tax brackets to figure out the amount that a worker’s tax will increase if they are able to earn additional dollars of income.  Here is an example to illustrate how tax brackets work.

In this example we will use the 2015 tax bracket based off of a single filer:

Taxable Income

10% $0 - $9,225

15% $9226 - $37,450

25% $37,451 - $90,750

28% $90,751 - $189,300

In this example you are a single filer without any dependents.  For the sake of simplicity your annual income for 2015 was $9,225.  Now, let’s say that you made an additional $1,000 per year.  This is how the government will use the tax brackets within our progressive tax system to tax your additional income in a fair manner.

$9,225 (normal income) x 10% (tax rate for your amount of income) = $922.5

$1000 (additional income for 2015) x 15% (your tax bracket or rate changed for that additional $1,000 and it will be taxed at a 15% rate) = $150

Now you will use this equation to figure out your taxable income:

$922.5 + $150 = $1,072.50

As you can see you were not taxed on a flat percentage rate for the amount of income that you made in 2015.

Keep in mind that $9,225 + $1,000 = $10,225.  If you look at the 2015 tax bracket for incomes you will figure out that a person with $10,225 is be taxed at a %15 rate.  Once again, this rate only applies to additional income that goes over $9,225 and up to $37,450.  Anything over or under these amounts would have to be taxed at a different rate.

Keep in mind that if the government took a flat rate percentage it would probably be about 1/4 of your income (if you were single without any dependents).  That would would mean that you would be charged a 25% tax rate on your income.  In other words you would have to pay $2,556.25 on your $10,225 annual income in 2015 as opposed to the $1,072.50.  Again, the progressive tax system and brackets that the IRS uses is designed to fairly tax people with higher incomes without leaving them broke.

Making More Income Within a Given Year

You should not forget that you will have to pay out extra money on any additional income that will place you within another tax bracket.  The additional tax money that you will have to pay will only be charged on the extra amount of money that you made.

So, if you decide to get an extra job, you should seriously consider how much money you are going to have to pay on that additional income.  One way you can figure out how much additional tax you will have to pay for extra earnings, is by using an income tax calculator and/or a federal tax calculator.  Both of these tools are available online and they can definitely help you to figure this information out.

What Tax Bracket am I in?

You will have to view the current IRS tax brackets for a given year to figure out what tax bracket you are in. Every year the tax bracket income levels seem to change. The 2013 tax brackets were different from the 2014 income tax brackets and in 2015 the income amount were also altered.

All the states have different tax rates and brackets.  For example, the California tax rate will be different from another state such as Idaho.  Again, you must check each different state and their tax requirements to figure out where you are and to accurately pay the right amount of tax.  Again, a federal income tax calculator can help you to determine taxable percentages on additional income.

Do not be misled by federal tax rates.  At this point they are necessary for keeping our country, economy and society operational.  More importantly, they are fair and are not designed to exploit the American people.  Understand tax brackets will help you to get the most from your income and not be frustrated with how the taxation system works in our nation.