Are Tax Brackets Based on Gross Income or Adjusted Gross Income?

by Rebecca K. McDowell ; Updated March 21, 2018

Individual federal income tax rates are determined by the taxpayer's marital status, filing status and income level, which are all used to categorize that taxpayer into a tax bracket. Tax brackets determine how much you're taxed on your personal income; to determine your tax bracket, the IRS looks at your taxable income rather than your gross income or your adjusted income.

Gross Income vs. Adjusted Gross Income

Gross income is all the income you earn during the tax year before any adjustments are made or any taxes are taken out, as long as that income is not tax-exempt (such as life insurance proceeds or child support payments). Gross income includes any Social Security or retirement benefits you receive that are taxable, income from a rental property, alimony payments, unemployment, and any capital gains from the sale of assets. For example, if your household made $100,000 in 2017 from wages, you sold your house for a $50,000 profit, and you also received taxable Social Security disability benefits of $10,000, your total gross income is $160,000.

Adjusted gross income, also called AGI, is calculated by subtracting certain deductions and expenses from your gross income. These include educator expenses, moving expenses, Health Savings Account deductions, alimony paid, tuition expenses, student loan interest and certain business expenses. For example, if your gross income is calculated to be $160,000 and you deduct $2,500 for moving expenses, $3,000 for student loan interest paid and $10,000 for alimony paid, your AGI is $144,500.

Taxable Income

Tax brackets are determined by taxable income, not by gross income or AGI. Taxable income is any money you made during the tax year on which you are required to pay income taxes. Taxable income may not include a portion or all of Social Security benefits or retirement distributions made from pre-tax retirement accounts. Taxable income can be reduced by deductions and credits, so your total taxable income is usually less than your gross income or even your adjusted gross income. It is your taxable income that determines your tax bracket.

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2017 Tax Brackets

Income taxes are assessed in tiers based upon the tax brackets. The portion of your income that corresponds with a particular bracket is taxed at that rate, and the totals are aggregated to determine your total tax for the year. For illustrative purposes, the tax brackets for the 2017 tax year for an individual filing single are:

  • 10 percent of taxable income from $0 to $9,325
  • 15 percent of taxable income from $9,325 to $37,950
  • 25 percent of taxable income from $37,950 to $91,900
  • 28 percent of taxable income from $91,900 to $191,650
  • 33 percent of taxable income from $191,650 to $416,700
  • 35 percent of taxable income from $416,700 to $418,400
  • 39.6 percent of taxable income from $418,400 and beyond

Based upon these brackets, if you are a single person whose taxable income for 2017 (your gross income reduced to AGI and further reduced by deductions and credits) was $100,000, you would pay $20,981.75 in taxes, as follows:

  • $932.50 for the first bracket (10 percent of all taxable income up to $9,325) 
  • $4,293.75 for the second bracket (15 percent of the difference between $9,325 and $37,950) 
  • $13,487.50 for the third bracket (25 percent of the difference between $37,950 and $91,900) 
  • $2,268 for the fourth bracket (28 percent of the difference between $91,900 and your total of $100,000)

The brackets for married couples filing jointly or married individuals filing as head of household are different.

Warnings

  • These tax brackets apply only to the 2017 tax year. The Tax Cuts and Jobs Act was signed into law in December 2017, and it changed the tax brackets for the 2018 year and onward.

About the Author

Rebecca K. McDowell is a creditors' rights attorney specializing in bankruptcy and related issues, including security interests, state and federal tax, and foreclosure. She holds a Bachelor of Arts in English literature and a Juris Doctor.

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