Tax Brackets

Tax Bracket written on a notebook on deskSo, what bracket are you in?

It’s impolite to ask people how much money they make, but you can make a ballpark guess if you know a little about the tax bracket system in the United States.

The federal government slots individuals and families into tax brackets, based on their taxable amount of income. Tax brackets are the government’s way of categorizing income tax rates. As income rises, so does the tax rate. Wealthy individuals pay a higher rate on their income than the poor. That is known as a progressive tax system.

So, if someone says they are in the 22% bracket, that would put their annual income level at somewhere between $52,851 and $84,200, according to the 2019 tax charts.

In a common-sense world, if you were making money in that range, $80,000 for example, it would make sense that paying taxes would be a matter of multiplying your total income ($80,000) by your tax bracket (22%) and you’d have your bill for the year ($17,600).

But we do not live in a common-sense world. We live in the United States, where the tax code is about as easy to read as the Dead Sea Scrolls. And twice as hard to understand.

The U.S. system uses something called marginal rates. You start by paying the lowest percentage (10%) on your first $9,700 of income, then the percentage rises as you reach each of the seven “marginal” levels in the current system.

That means in 2019, the individual would pay the lowest rate (10%) on the first $9,700 ($970) they make; then 12% on anything the earn from $9,701 to $39,475 ($3,572); then 22% on the rest, up to $80,000 ($8,915) for a total tax bill of $13,458.

Effectively then, you are paying a tax rate of 16.8% (13,458 ÷ 80,000 = .168), which is less that the 22% tax bracket you’re actually in.

Make sense? Confusing? Who came up with idea? No. Yes. Politicians, probably with (a lot of) help from some well-intentioned mathematicians.

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How Tax Brackets Add Up

Somehow, taxpayers wade through all that bracketology and make payments and get refunds. In 2017, the Internal Revenue Service collected $3.4 trillion in taxes from 245 million tax returns.

The IRS also issued returns to 121 million individuals, totaling $437 billion.

For the 2019 tax year, there were seven marginal tax brackets, with rates ranging from 10% to 35%, across four categories – single filers, married filing jointly or qualifying widow/widower, married filing separately, and head of household.

As complicated as that seems, it’s certainly an improvement over what taxpayers were facing in 1918, when there were 55 tax brackets and top marginal rate was 77%. Imagine calculating your bill if you were in the 66th or so bracket!

The number of brackets eventually dropped to more manageable numbers, bottoming out in 1988 when single and married couples making $29,750 or less paid 15% and anyone over that paid 28%.

Taxes being a favorite toy of politicians to play with, the number of brackets steadily increased over the last 30 years and currently stands at seven brackets

Tax Brackets and the Tax Cuts and Jobs Act of 2017

The most recent tax policy – the Tax Cuts and Jobs Act of 2017 – didn’t add any brackets, but it did rearrange some percentages in the seven brackets.

The most notable change was reducing the marginal tax rate in three of the four lowest brackets by 1%-to-4%.

The new law also nearly doubled the standard deduction for all segments of taxpayers. Single taxpayers saw their standard deduction jump from $6,350 to $12,000. Married couples filing jointly or a surviving spouse went from $13,000 to $24,000.

The head of a household’s went from $9,550 to $18,000 and married couples filing separately receive a $12,000 deduction, up from $6,500.

Taxpayers can either use the standard deduction or itemize deductions to reduce the amount of taxable income they must pay.

All other things being equal, that means that payers in nearly every tax bracket will pay less in taxes under the new law.

Here is a look at what the brackets and tax rates are for 2019:

2019 Tax Brackets
Tax rate Single filers Married filing jointly or qualifying widow/widower Married filing separately Head of household
10% $0 to $9,700 $0 to $19,400 Up to $9,700 Up to $13,850
12% $9,701 – $39,475 $19,401 – $78,950 $9,701 – $39,475 $13,851 – $52,850
22% $39,476 – $84,200 $78,951 – $168,400 $39,476 – $84,200 $52,851 – $84,200
24% $84,201 – $160,725 $168,401 – $321,450 $84,201 – $160,725 $84,201 – $160,700
32% $160,726 – $204,100 $321,451 – $408,200 $160,726 – $204,100 $160,701 – $204,100
35% $204,101 – $510,300 $408,201 – $612,350 $204,101 – $306,750 $204,101 – $510,300
37% $510,301 or more $612,351 or more $306,751 or more $510,301 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.

California has the highest state income tax at 13.3% with Hawaii (11%), Oregon (9.9%), Minnesota (9.85%) and Iowa (8.98%) rounding out the top five.

Seven states – Florida, Alaska, Wyoming, Washington, Texas, South Dakota and Nevada – have no state income tax. Tennessee and New Hampshire tax interest and dividend income, but not income from wages.

Not surprisingly, New York City has a deserved reputation for taxing income with rates ranging from 2.9% to 3.65%, but surprisingly, they are not the worst. Most of Pennsylvania cities tax income, with Philadelphia leading the way at 3.98% and Scranton not far behind at 3.4%.
Ohio has more than 550 cities and towns that tax personal income.

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at bfay@debt.org.

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