Tax Brackets Explained

Some of the most common questions we get regarding tax assistance in Des Moines, IA are about tax brackets. We understand—tax brackets can be extremely confusing, especially since they recently changed due to the Tax Cuts and Jobs Act (TCJA) of 2017.

To help you out as you prepare to file your 2018 taxes, here’s a quick and easy guide to understanding tax brackets, what they’re used for and how they can affect you.

What are tax brackets?

Federal tax brackets are used to break United States tax filers into groups based on their income. Depending on which bracket your income falls under, it will be taxed at a certain percentage. However, while this seems simple, it really is not.

There are seven different tax bracket rates that have taxation amounts between 10 and 37 percent. The more money you make, the more you are taxed by the government. The seven tax bracket rates are as follows:

  • 10 percent
  • 12 percent
  • 22 percent
  • 24 percent
  • 32 percent
  • 35 percent
  • 37 percent

Inside each tax bracket, there is a minimum and maximum amount. These numbers determine the income levels that apply to each tax rate.

The income levels within each bracket will differ based on how you are filing: single, married filing jointly, married filing separately or head of household. The first thing you’ll want to do when examining tax brackets is identify how you will be filing for that tax year.

There are also two designations of tax rates: the marginal tax rate and the effective tax rate. Marginal tax rate refers to the tax bracket you fall into based on the total amount of money you earn. For example, if you are filing single and made $80,000 last year, your marginal tax rate is 22 percent.

The effective tax rate, however, is different. This refers to the actual rate of tax you pay across all your income. The reason this rate differs from your marginal tax rate is because your income is not actually taxed based on the final bracket your income falls under.

How income is really taxed

What most people don’t understand about tax brackets is that they are designed to split up your income with different rates of tax. This ensures that everyone pays equal taxes according to the amount of money they made in a given year.

What this means is that only the income that falls within a particular tax bracket is taxed at that rate.

Take, for example, the single filer tax brackets for 2018 (using only the first few):

  • Income between $0 and $9,525 is taxed at 10 percent
  • Income between $9,526 and $38,700 is taxed at 12 percent
  • Income between $38,701 and $82,500 is taxed at 22 percent
  • Income between $82,501 and $157,500 is taxed at 24 percent

If you made $80,000 last year, you don’t owe 22 percent of that full $80,000! Instead, you pay tax according to the brackets.

The first $9,525 you made is taxed at 10 percent. Then, the income between $9,526 and $38,700 is taxed at 12 percent (12 percent of $29,174). Then, the income between $38,701 and $80,000 (your yearly total) is taxed at 22 percent (22 percent of $41,299).

The total of each of those taxed brackets is combined to form your total owed income tax.

We understand that this method of taxation can be confusing. For this reason, if you require tax assistance in Des Moines, IA, contact Accounting & Tax Professionals, PLC! We’ll be happy to help you sort out your tax returns for 2018 so you understand just what is happening with your income taxes.

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