Understanding Federal Tax Tables & Income Tax Brackets
Section 3 of the Internal Revenue Code directs the IRS to publish IRS tax tables annually for individuals. The tables include rates, a range of personal income under each rate as well as an estimated taxable income.
The tables allow taxpayers to estimate their liability without making computations. The tax tables for each year’s 1040 are published in a booklet (2017 income tax tables can be found here). The tables contain very narrow ranges of taxable income so that you can arrive at an amount that is as precise as possible.
The IRS tax tables provide estimates for income under $100,000 and a worksheet for incomes above that. Of course, our software will always automatically calculate a users exact liability so estimating is not required.
The federal tax system is progressive through various brackets. A bracket is a range of incomes separated from other ranges and given a certain percentage tax rate. For ordinary income, there are seven brackets, each tied to a rate (percentage): 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Tax rates increase as income increases. A range of income, from a base amount to a ceiling amount, falls within each income tax bracket. The range varies, depending on filing status (single, married filing jointly, married filing separately, or head of household).
For example, a single taxpayer’s rates for tax year 2017 (for tax returns that were due, without extension, on April 16, 2018) are as follows:
- Income up to $9,325 is in the 10% bracket
- $9,326 to $37,950 is 15%
- $37,951 to $91,900 is 25%
- $91,901 to $190,650 is 28%
- $190,651 to $416,700 is 33%
- $416,701 to $418,400 is 35%
- Income of $418,401 or more is 39.6%
The tax rates for each bracket are derived from section 1 of the Internal Revenue Code, but are adjusted for inflation each year. The inflation adjustment is designed to prevent “bracket creep,” in which taxpayers would be pushed into higher brackets because of inflation rather than increases in their income levels.
Marginal and Effective Rates
Not all taxpayer income is subject to the rate in which their income tax bracket falls. For example, if a single filer's income falls between $37,951 and $91,900 (25% bracket), only the amount over $37,950 is taxed at the 25% rate. The first $9,325 this individual earns is taxed at 10%, the next $28,625 is taxed at 15%. Just the income over $37,950 is taxed at 25%.
- On income between $0 to $9,325 you pay 10%.
- Between $9,326 to $37,950 you pay 15% plus $932.50 (because $932.50 is 10% of $9,325).
- $37,951 to $91,900 you pay 25% plus $5,183.75 (because $5,226.25 is $932.50 plus 15% of $28,625, which is the difference between $37,650 and $9,275).
- $91,901 to $191,650 you pay 28% plus $18,713.75.
- $191,651 to $416,700 you pay 33% plus $46,643.75.
- $416,701 to $418,400 you pay 35% plus $120,910.25.
- Income over $418,401 you pay 39.6% plus $121,505.25.
Only the last dollar of income determines the bracket into which a taxpayer falls. Someone making $40,000 annually pays roughly $5,739 or 14.3% of their income. This is their effective tax rate, where the last rate which they are taxed (25%) is their marginal rate.
Confusion about marginal and effective rates is the reason people are sometimes reluctant to move into a higher income tax bracket. The reluctance is largely misplaced. Suppose a taxpayer is given a raise from $35,000 annually to $40,000. If all of this income were taxed at the marginal rate, then this taxpayers after-tax situation would barely change since they are moving from the 15% bracket into the 25% bracket. Fortunately, for all taxpayers only the income within the new bracket is taxed at the 25% rate.
Capital Gains Rates
The federal taxation of "capital gains" (see more here) is also progressive.
The tax rates on short-term capital gains (gains from the sale of investments or assets held for one year or less) are the same as the rates for ordinary income. Short-term capital gains run through the brackets in the same way that ordinary income does in the examples above.
Generally, long-term capital gains (gains from the sale of investments held for more than one year) fall into three brackets, but these three brackets are tied to the seven brackets for ordinary income (and short-term capital gain).
- A taxpayer in either the 10% or 15% ordinary-income brackets pays 0% long-term capital-gains.
- In the 25%, 28%, 33%, or 35% brackets pays 15% long-term capital-gains.
- In the 39.6% bracket pays 20% long-term capital gains.
States may also impose their own capital gains rates.