Filing Tax Returns: What is a Tax Bracket?

The tax brackets used by the IRS every year to tax American citizens may seem pretty straight-forward at first but it is way more complicated than what it seems at the surface. For one, the brackets change every year. The US government does not tax its citizens at the same rate every year. And two, the tax rates you see written on the table is not what you pay if you happen to fall in a particular bracket. Your taxable income is taxed at a progressive rate after all the deductions and exemptions have been applied. Confused yet? Let’s move beyond the tax jargons and decode tax brackets simply in this post.




What is a tax bracket?

Have a look at the tax brackets that the IRS has declared for the tax year 2020, returns to be filed in 2021.

Tax Rate Single Married (Joint Filing) Head of Household
10% $0-9,875 $0-19,750 $0-14,100
12% $9,876-40,125 $19,751-80,250 $14,101-53,700
22% $40,126-85,525 $80,251-171,050 $53,701-85,500
24% $85,526-163,300 $171,051-326,600 $85,501-163,300
32% $163,301-207,350 $326,601-414,700 $163,301-207,350
35% $207,351-518,400 $414,701-622,050 $207,351-518,400
37% >$518,400 >$622,050 >$518,400


Depending on whether you are filing your tax returns as a single taxpayer, jointly with your spouse, or as the head of the household with multiple dependents, your taxable income (ranges mentioned under each category) will be charged at the rate mentioned in the first column of the above table. That will be your tax bracket. Note, the figures mentioned under single, married, and head of household are not your net income for the year 2020. They are the taxable income ranges, that is, the amount you come to after subtracting all non-taxable expenditures and investments from your net income.

How is your tax calculated?

Let’s explain this with an example.

So, the $82,400 is your net income. That is, includes the paycheck you got from your employer, the earnings from your side hustle, rent from properties, and so on. From this, you will have to subtract the non-taxable payments that you have made throughout the year. Contributions to retirement funds or interests of student loans are not taxed. Eliminating these from your net income will fetch you the gross adjusted income or GAI. For simplicity, let’s assume that it comes to $72,400.

From the adjusted income, you will then be eligible for a standard deduction of $12,400 as a single tax filer and if you are not claiming itemized deductions. This will fetch your taxable income which now stands at $60,000. Time to look at the table above.

As a single filer, the $60,000 taxable income falls in the 22% tax bracket for the year 2020. But it will not be charged exactly at 22%. Instead, you will have to pay your taxes in a progressive system. The first $9,875 will be taxed at 10%, the next $30,250 at 12%, and so on. By our example, the net tax will be calculated as:

10% of $9,875 = $987.50

12% of ($40,125-9,875 = $30,125) = $3,630

22% of ($60,000-40,125 = $19,875) = $4,372.5

Hence, total tax = $8,990.

Is that too much?

If $8,990 just in income taxes seems too much, there are various ways to reduce your taxable income and take more home than paying the IRS. Explore with a professional the various tax credits and deductions that work to reduce taxes or update your W-4 accordingly to get a refund in the tax season instead of paying anything. In the end, tax brackets have been kept as people-friendly as possible. With adequate planning, you can reduce your taxes by investing in non-taxable savings.


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