How to Calculate Tax Brackets & Effective Rates

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Perhaps you have heard the quote from Benjamin Franklin, "The only things certain in life are death and taxes." While millions of Americans file their income tax returns every year, very few of them can tell you what their tax bracket is and what tax effective rate they paid on their taxes.

This may be partially caused by the federal tax rates being adjusted for inflation every year and as they change so do the tax brackets. Perhaps it also has to do with all the different brackets for various filing statuses. However, more likely, it has to do with our system being a progressive tax system, meaning when you earn more income, the rate on additional dollars earned goes up.

Many countries use tax brackets and a progressive system for incomes taxes. As a person's income increases, higher taxes will be implemented. If an individual's income lessens, so will the tax burden.

What Are Tax Brackets?

There are seven tax brackets in the United States. The brackets include a specific income range that varies, depending on filing status (single, married filing jointly, etc.). Each IRS tax bracket has a slightly different tax rate. As you move up the brackets, the percentage of tax increases. An individual who made over $415,050 as a single filer in 2016 had to pay 39.6 percent in taxes that year. Those who made under $9,276 as a single filer only had to pay 10 percent. You can find the income tax brackets for the past several years here.

To keep tax brackets in check, the IRS adjusts over 40 tax provisions every year to account for inflation. This prevents someone from being pushed into a higher tax bracket if his or her income has not really changed compared to the cost of living.

Keep in mind that IRS tax brackets depend on taxable income. Your taxable income usually is not the amount of your yearly take-home pay because you have to adjust for deductions and tax credits. Figuring out this number can be tricky for some taxpayers. You can estimate which bracket you would fall into by using our tax bracket calculator.

While rates are bracketed the increase only applies to dollars earned within that particular tax bracket. So for a practical example let's see what this means for Joe Schmoe individual filer making $36,000 annually:

Tax Bracket Calculator

Joe will pay $927.50, or 10%, on the first $9,275 in income and then $4,008.75 on the next $26,725  in income ( [$36,000 - $9275 = $26,725] x 15% = $4,008.75). So, for this example Joe will end up paying $4,936.25. Joe fell into the 15% bracket but only ended up paying 13.71% ($4,936.25 / $36,000 = 13.71%) as his effective rate.

What this helps to illustrate is how two filers in the same tax bracket can have different rates and why it can be so difficult for people to understand what bracket and rate they are paying.

At certain points, bracket increases are very gradual and at others they are much more steep. For example if you look at what were to happen if Joe earned over $37,650 a year he would have to pay an additional 10% on all income over this amount. No where else in the tax code is the rate hike as great as when a filer moves from the 2nd to 3rd bracket. This is true regardless of status.

Our online tax preparation, as always, will do this calculation for users but we still felt it was import to provide you with a general understanding of tax brackets work and how to calculate your effective rate.

IRS Income Tax Brackets for 2016

Tax rate Single filers Married filing jointly or qualifying widow(er) Married filing separately Head of household
10% Up to $9,275 Up to $18,550 Up to $9,275 Up to $13,250
15% $9,276 - $37,650 $18,551 - $75,300 $9,276 - $37,650 $13,251 - $50,400
25% $37,651 - $91,150 $75,301 - $151,900 $37,651 - $75,950 $50,401 - $130,150
28% $91,151 - $190,150 $151,901 - $231,450 $75,951 - $115,725 $130,151 - $210,800
33% $190,151 - $413,350 $231,451 - $413,350 $115,726 - $206,675 $210,801 - $413,350
35% $413,351 - $415,050 $413,351 - $466,950 $206,676 - $233,475 $411,351 - $441,000
39.6% $415,051 or more $466,951 or more $233,476 or more $441,001 or more

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