Many Americans don’t realize it, but few taxpayers fall into just one tax bracket. They fall into two or even more brackets depending on how much they earn. Their effective tax rate is more or less a combination of all of them.
You can identify your current tax obligations by matching your income to one of several IRS-mandated income brackets. Once you have found your designated bracket, you can quickly determine the percentage tax you will pay on your income using the charts and tables provided by the IRS.
Your Filing Status
Your tax bracket – or brackets – depend on your filing status, and there are five of them: single, head of household, married filing jointly, married filing separately, and qualifying widow or widower. Although the tax percentages remain the same in all brackets, they can cover different ranges of income based on your filing status.
The Internal Revenue Service bases these statuses on whether you’re considered unmarried or married, and this is where things can get tricky. If you’re divorced on Dec. 31 of the tax year, you’re considered unmarried. You can’t file a joint return with your spouse even though you were legally married for 364 days of the year.Single status covers you if you’re legally separated under your state’s laws. To file your taxes as head of household, you must be considered unmarried, have a qualifying dependent, and pay more than half the costs of maintaining your home. In this case, considered unmarried means you haven’t lived with your spouse at any time during the last six months of the year. The qualifying widow/er status is temporary and allows you to file a joint married return for up to two years after your spouse dies if you meet certain other requirements.
Tax Brackets for 2018
There are seven tax brackets as of 2018: 10, 12, 22, 24, 32, 35 and 37 percent. If you’re single and you earn $50,000 a year, this puts you in the 22 percent tax bracket for at least some of your income. However, if you’re married and file a joint return and together you and your spouse earn $50,000, you’d fall in the 12 percent tax bracket. You’d also fall into the 12 percent tax bracket at this income level if you qualify for head of household filing status. A single taxpayer would have to earn more than $500,000 a year to reach the 37 percent tax bracket. These numbers apply to income you earn in 2018, not the 2017 income you file a tax return for in 2018. The 2017 brackets were different.
How Tax Brackets Work
The U.S. tax system is progressive, which means that you pay a higher percentage in taxes the more you earn. If you’re single and you earn $50,000 in taxable income a year, you fall into three tax brackets. The first $9,525 you earn is taxed in the first 10 percent bracket. Your income between $9,526 and $38,700 is taxed in the 12 percent tax bracket, and the remaining $11,300 balance is taxed at 22 percent. The tax rates associated with each of these brackets are called marginal tax rates.
Your Effective Tax Rate
Your effective tax rate is your real tax rate – the percentage of your income that you pay in taxes.
If you’re single and you earn $35,000, you fall into two tax brackets of 10 and 12 percent. You can calculate your effective tax rate by first calculating the percentage you’ll pay in taxes on the first $9,525, which comes out to $952.50 in the 10 percent bracket. Do the same with the portion of your income that falls into the 12 percent bracket. This comes out to $3,057 – 12 percent of the balance of your earnings over $9,525 that fall in the higher tax bracket.
Now add those numbers to get your total tax liability. Divide this number by the total amount of your income: $4,009 ($3,057 plus $952) divided by $35,000. Your effective tax rate is 11 percent.
- Business Insider: Here’s a Look at What the New Income Tax Brackets Mean
- Tax Foundation: 2018 Tax Brackets
- Tax Brackets & Rates for Each Income Level (2019-2020)
- What is the difference between marginal and average tax rates? | Tax Policy Center
- IRS: Determining Your Correct Filing Status
- IRS Tax Map: Qualifying Widow(er)
- You can calculate how much an additional deduction will save you based on your tax bracket by multiplying your bracket by the amount of the deduction. For example, say you're in the 15 percent bracket and you're considering contributing $1,000 to a traditional IRA. That $1,000 deduction saves you $150 in taxes.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.