Tax Bracket Definition
A tax bracket is a range of income subjected to a particular income tax rate within a progressive tax system. As an individual’s or business’s taxable income increases, it moves through different brackets, each imposing a higher percentage of tax on the income within that bracket. Tax brackets are foundational in ensuring that income tax is progressive, meaning higher earners pay a higher percentage of their income in taxes.
Examples
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Single Filers in the United States (2022 tax year)
- 10% Tax Bracket: Income from $0 to $10,275
- 12% Tax Bracket: Income from $10,276 to $41,775
- 22% Tax Bracket: Income from $41,776 to $89,075
- And so on…
-
Married Couples Filing Jointly in the United States (2022 tax year)
- 10% Tax Bracket: Income from $0 to $20,550
- 12% Tax Bracket: Income from $20,551 to $83,550
- 22% Tax Bracket: Income from $83,551 to $178,150
- And so on…
-
United Kingdom
- Basic Rate (20%): Taxable income from £12,571 to £50,270
- Higher Rate (40%): Taxable income from £50,271 to £150,000
- Additional Rate (45%): Taxable income over £150,000
Frequently Asked Questions (FAQs)
What is a progressive tax system?
A progressive tax system is designed such that the tax rate increases as the taxable amount increases. It aims to reduce the tax burden on those with a lower ability to pay.
Do tax brackets include deductions and credits?
Tax brackets apply to taxable income, which is the amount remaining after deductions (like student loan interest or mortgage interest) but before tax credits (like earned income credit).
How can someone decrease their position in a tax bracket?
Taxable income can be reduced by contributing to retirement accounts, making charitable donations, or taking advantage of other deductions to potentially fall into a lower tax bracket.
Does having a higher income mean all income is taxed at the highest rate?
No, only the income within a specific bracket is taxed at that bracket’s rate. For example, in the US, a person earning $50,000 will pay 10% tax up to $10,275, 12% on income between $10,276 and $41,775, and 22% on income over $41,775.
Are tax brackets the same for everyone?
Tax brackets can vary based on filing status, such as single, married filing jointly, married filing separately, or head of household, and they differ between countries.
Related Terms with Definitions
Basic Rate of Income Tax
A tax rate applied to income above personal allowances and below higher thresholds. Typically, it’s a lower rate aimed at initial portions of taxable income.
Higher Rate of Income Tax
A higher rate of tax that applies to income exceeding a basic threshold but below an additional rate threshold, aimed at higher portions of taxable income.
Progressive Tax
A taxing mechanism in which the taxing rate increases as the taxable amount increases, designed to collect more tax from those who can afford to pay more.
Effective Tax Rate
The average rate at which an individual or a corporation is taxed, calculated by dividing total taxes paid by total taxable income.
Marginal Tax Rate
The percentage of tax applied to your income for each tax bracket in which you qualify, representing the rate at which your next dollar of income will be taxed.
Online References to Online Resources
Suggested Books for Further Studies
- “Federal Income Taxation” by Joseph Bankman, Daniel N. Shaviro, and Kirk J. Stark
- “Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes” by Joel Slemrod and Jon Bakija
- “Principles of Taxation for Business and Investment Planning” by Sally M. Jones
Accounting Basics: “Tax Bracket” Fundamentals Quiz
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