Figuring out U.S. tax brackets can be like operating the espresso machine you got for your wedding. It’s just sitting there, taunting you with its secrets. You should probably learn how it works, but it seems too complicated to even try.
But tax brackets are the pillar on which our tiered tax system is based, and knowing which bracket you fall into is just the tip of the iceberg when it comes to navigating and mitigating your tax burden. Like with many areas of finance, your understanding of other tax-related issues will deepen when you take the time to understand bracketing.
Take the plunge and learn what you’ve been avoiding for years. We promise – it’s not as complicated as you think.
What is a tax bracket?
A tax bracket is a system that shows how much a person will pay in taxes. In the U.S., we have progressive tax brackets — the more you earn, the more you’ll pay in taxes.
How do I determine my tax bracket?
Online calculators can give you a rough estimate of what tax bracket you fall into. Depending on your deductions and filing status, you may fall into a lower bracket. For example, if you earn $55,000 a year, you might assume that you fall into the 25% tax bracket.
But if you’re a single mother, then you likely file taxes as the head of household. With that income and filing status, you’ll be in the 15% tax bracket. If you have to know for certain, a financial advisor can assess your current financial situation and give you the information you need.
How to lower your tax bracket
You can legally lower your tax burden. If you can decrease your taxable income, you can fall into a lower bracket and pay fewer taxes.
Deductions and exemptions lower your taxable income — the more you have, the less you’ll pay in taxes. Contributions to a traditional IRA or 401(k) will also reduce your taxable income.
You can contribute up to $5,500 in an IRA or $18,000 in a 401(k).
If you’re self-employed, deductible business expenses will lower your taxable income. Debating about that conference trip? Take it. Just be aware that some lenders (primarily mortgage) look at your net income to determine your creditworthiness, so if you’re looking to apply soon, you may want to bite the bullet and pay high taxes for a year or two and show the higher income.
The IRS regularly adjusts tax brackets to reflect the effects of inflation. See below to find out which bracket you’re likely to be in for 2016.
| Tax Bracket | Income for Single | Income for Married Filing Jointly | Income for Head of Household |
|---|---|---|---|
| 10% | Less than $9,275 | Less than $18,550 | Less than $13,250 |
| 15% | Between $9,275 and $37,650 | Between $18,550 and $75,300 | Between $13,250 and $50,400 |
| 25% | Between $37,650 and $91,150 | Between $75,300 and $151,900 | Between $50,400 and $130,150 |
| 28% | Between $91,150 and $190,150 | Between $151,900 and $231,450 | Between $130,150 and $210,800 |
| 33% | Between $190,150 and $413,350 | Between $231,450 and $413,350 | Between $210,800 and $413,350 |
| 35% | Between $413,350 and $415,050 | Between $413,350 and $466,950 | Between $413,350 and $441,000 |
| 39.6% | More than $415,050 | More than $466,950 | More than $441,000 |
If you’re married…
Once married couples get past the 15% tax bracket, the IRS treats their income differently than if they were single. That’s because your expenses often decrease when you merge finances, so the government changes your tax brackets accordingly. For example, a single person earning $190,000 a year falls into the 28% tax bracket. If two people earning that amount get married, they’re in the 33% tax bracket.
Depending on your income, it may be worth the money to consult a tax professional or financial advisor who can help you figure out how much getting married will affect your tax bracket.
Common tax bracket misconceptions
One common worry is that making more money will result in more taxes paid, so that your overall net income will go down. This has become one of the more popular tax myths that gets bandied about, but fortunately that’s not how our tax code works.
The U.S. has a marginal tax rate system. If you look at the table above, you can see that if you earn $50,000 a year and are filing single, you’ll pay 10% on the first $9,275, 15% for between $9,275 and $37,650 and 25% for $37,650 and up.
In other words, you don’t pay 25% in taxes on your entire salary — just the part that’s above $37,650. This way, taxpayers always have an incentive to earn more money.
Deductions work similarly. If you spend $100 on a deductible item (like a charitable contribution) and are in the 15% tax bracket, you’ll save $15 on taxes. If you were in the 33% tax bracket, you’d save $33 on taxes. That doesn’t mean spending more money will help you save overall, but it’s a good way to look at expenses you can deduct.
