Tax Brackets

Tax brackets are simply the government’s way of categorizing income tax rates. As income rises, so does the tax rate. This is known as a progressive tax system. Tax brackets indicate marginal rates based on income levels; a marginal rate is the rate that someone pays on a segment of income. Only Congress has the authority to change tax brackets; even small changes affect millions of Americans – either saving them money or costing them more in taxes.

The first portion of someone’s income is taxed at the lowest rate in the lowest bracket; the next portion is taxed at the next rate; and the final portion of income is taxed an even higher rate. For example, according to the chart below, a single taxpayer earning $40,000 will pay only 10 percent tax on his first $8,700 of income. He will then pay 15 percent on the next $26,650, and 25 percent on the remaining $4,650. His tax bracket is 25 percent.

The effective rate of tax – the amount someone actually owes – is not shown in a tax bracket, but rather is determined by adding up the taxes paid in each tax bracket. So for the example mentioned above, the effective tax rate would be 15 percent.

For the 2012 tax year, there were six marginal tax brackets, with rates ranging from 10 percent to 35 percent, across four categories – single filers, married filing jointly or qualifying widow/widower, married filing separately, and head of household.

2012 Tax Brackets
Tax rate Single filers Married filing jointly or qualifying widow/widower Married filing separately Head of household
10% Up to $8,700 Up to $17,400 Up to $8,700 Up to $12,400
15% $8,701 – $35,350 $17,401 – $70,700 $8,701 – $35,350 $12,401 – $47,350
25% $35,351 – $85,650 $70,701 – $142,700 $35,351 – $71,350 $47,351 – $122,300
28% $85,651 – $178,650 $142,701 – $217,450 $71,351 – $108,725 $122,301 – $198,050
33% $178,651 – $388,350 $217,451 – $388,350 $108,726 – $194,175 $198,051 – $388,350
35% $388,351 or more $388,351 or more $194,176 or more $388,351 or more

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History of Federal Tax Brackets

The modern federal income tax was authorized in 1913 when the 16th amendment to the Constitution established Congress’ right to impose a tax on revenue earned by individuals and corporations. For the first few years of the income tax, there were seven tax brackets for individual taxpayers, with rates ranging from 1 to 7 percent.

By 1918, there were 55 tax brackets, with a top marginal rate of 77 percent. Over the years, the number of brackets and their rates fluctuated, going down during the 1920s and shooting back up again during the Great Depression. In 1933, there were 55 brackets and a top rate of 63 percent.

During World War II, there were 23 brackets, with rates between 19 and 88 percent; in 1944, in order to pay for the war, rates topped out at 94 percent. From the early 1950s to the early 1960s, there were 24 brackets, with rates between 20 and 91 percent. In the mid- to late-1960s and throughout the 1970s, there were 25 brackets, with rates between 14 and 70 percent.

In 1979, there were 16 brackets. By 1987, there were only five, and in 1988, just two. Three more brackets were added in the 1990s, and in 2002, a sixth bracket was added to the tax table.

Congress Adds Another Bracket

In January 2013, Congress passed the American Taxpayer Relief Act of 2012. The law added a seventh bracket, with a marginal rate of 39.6 percent on incomes of $400,000 or more for single filers and $450,000 or more for married couples filing jointly. The law also adjusted the cutoff amounts of the six lower brackets.

For the 2013 tax year — taxes that must be paid by April 15, 2014 — the federal income tax brackets look like this:

2013 Tax Brackets
Tax rate Single filers Married filing jointly or qualifying widow/widower Married filing separately Head of household
10% Up to $8,925 Up to $17,850 Up to $8,925 Up to $12,750
15% $8,926 – $36,250 $17,851 – $72,500 $8,926 – $36,250 $12,751 – $48,600
25% $36,251 – $87,850 $72,501 – $146,400 $36,251 – $73,200 $48,601 – $125,450
28% $87,851 – $183,250 $146,401 – $223,050 $73,201 – $111,525 $125,451 – $203,150
33% $183,251 – $398,350 $223,051 – $398,350 $111,526 – $199,175 $203,151 – $3988,350
35% $398,351 – $400,000 $398,351 – $450,000 $199,176 – $225,000 $398,351 – $425,000
39.6% $400,001 or more $450,001 or more 225,001 or more $425,001 or more

State and Local Tax Brackets

States and cities that impose income taxes typically have their own brackets, with rates that are usually lower than the federal government’s. The combined rate is the federal rate, plus the state and/or city rate.

For example, a taxpayer in the 25 percent federal tax bracket who is also in a state bracket of 5 percent will have a combined rate of 30 percent, although his effective rate will be lower. In addition, state and local taxes are typically deductible on federal tax returns.

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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