Understanding Income Tax Brackets

Depending on who you have a conversation with, you may get mixed information about how income tax brackets work and what the impact will be on your taxes. Contrary to the volume of misinformation that is out there, how tax brackets work is clearly laid out by the IRS and is quite simple to understand. The most important factors that those looking to file their taxes this year need to understand are what the 2019 tax brackets are, where their income falls along the scale, and what the impact will be on their refund or tax burden.

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How many income tax brackets are there?

The 2019 tax brackets are broken up into six different categories based on the amount of income you make. Within these six categories, there are four filing statuses — single, married filing separately, married filing jointly, and head of household. Where you fall within the six 2019 tax brackets is solely dependent on how much money you make. Your filing status depends on your marital status and how you choose to file.

What are the 2019 tax brackets?

Rate Single Married Filing Jointly Head of Household
10% Up to $9,700 $0 – $19,400 $0 – $13,850
12% $9,7001 – $39,475 $19,401 – $78,950 $13,851 – $52,850
22% $39,476 – $84,200 $78,951 – $168,400 $52,851 – $84,200
24% $84,201 – $160,725 $168,401 – $321,450 $84,201 – $160,700
32% $160,726 – $204,100 $321,451 – $408,200 $160,701 – $204,100
35% $204,1001 – $510,300 $408,201 – $612,350 $204,101 – $510,300
37% $510,301 + $612,351 + $510,301 +

How federal income tax brackets work

While there is no argument about what the 2019 tax brackets are, there is a considerable amount of misinformation when it comes to your tax liability. You may have heard people tell you to be careful not to make too much money or you’d end up in a higher tax bracket. While their heart is in the right spot, this is bad information.

Let’s look at an example to illustrate this concept. Keep in mind that in this example we are going to disregard deductions, exemptions, and any other outside influences that might impact individual unique tax situations.

Let’s say you are a single individual that made $9,700 last year. According to the 2019 tax brackets, you would owe 10% of that income, or $970. What happens, though, if you were to make $9,701?

According to some people, you’d now owe a significantly larger portion of taxes because according to the 2019 tax brackets chart, you’re now in the 12% range. This is incorrect.

Every dollar that is made between $0 and $9,700 is taxed at 10%. Even if you make $20 million, your first $9,700 is taxed at 10%. Any dollar over $9,700 and up to $39,475 is taxed at 12%. The additional dollar earned in our example will be charged at 12%, but the remaining $9,700 will be taxed at 10%. So, your total tax liability will be 10% of $9,700 and an additional 12 cents on the $1 made, so $970.12. Contrary to what some would believe, making that extra dollar only increases your tax burden by $0.12.

This continues all the way up the tax bracket until all of your funds have been taxed. If you file jointly with your spouse and you each made $45,000 in 2019, your total income subject to income tax (barring deductions) is $90,000. According to the 2019 tax brackets, you’d be in the 22% bracket. However, as we already know, this does not mean you owe 22% in taxes on all of your income.

The breakdown would look like this:

10% tax owed on $19,400
12% tax owed on $59,550 (income from $19,401 to $78,950)
22% tax owed on $11,050 (income over $78,950)

The total would be $11,517 of tax liability on $90,000 of income filed jointly in 2019. As you can see, $11,517 is not 22% of $90,000. In fact, it is only 12.80%. This number is known as your effective tax rate. It is the rate of federal income tax that you are actually paying. This number differs from your marginal tax rate, which is the percentage at which your last dollar of income is being taxed. So, in this example, the marginal tax rate is 22% and the effective tax rate is 12.80%.

Keep in mind that these calculations are made in a vacuum devoid of outside influences to illustrate a point. In reality, your tax burden will most likely be lower than this as you factor in deductions and write-offs and assuming you don’t have other liabilities or streams of income that need to be accounted for. The standard deduction alone for a married couple in 2019 is $24,400, which would bring your taxable income from $90,000 down to $65,600 for the year. This would make your tax burden $7,484, your marginal tax rate 12%, and your effective tax rate 11.41%.

Trevor Hall, a 12-year veteran of the tax industry, CPA, certified forensic accountant, and owner of Hall & Associates CPAs says the need to explain this misinformation is far too common these days.

“Many people make poor tax plans trying to dodge breaking into that next tax bracket up thinking it will magically incur, another $25,000 in taxes,” Hall says. “That fear and misunderstanding make them miss out on income, or possibly take aggressive unwise deductions because they do not have the proper information.”

The bottom line

Fully understanding how income tax brackets work will help you better prepare yourself to plan for your tax burden or tax refund. Do be aware that the 2019 tax brackets will change for the 2020 fiscal year meaning the amount you owe next year on the same income will be different.

The biggest takeaway is that earning extra income that increases your marginal tax rate is not a bad thing that negatively affects previous money you’ve earned. Yes, you will keep a smaller piece of future money you earn, but everything covered in the lower bracket is protected. The best way to ensure you’re getting the most out of your return or limiting what you owe is to enlist the help of a tax professional or a reputable tax software program. U.S. tax code is incredibly long and confusing, which leaves opportunities for you to make mistakes and miss out on potential savings and exemptions.

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