United States Taxes - What are the Brackets?

By Clark K. — Published February 14, 2018

United States Taxes - What are the Brackets?

If you’re an American citizen who has always wondered how tax payments in the United States work, you’re not alone. It’s one of those things that perplexes most people. However, it’s something that can’t be ignored because, sooner or later, you’re going to have to pay your taxes. There is no alternative.

So, it’s a wise idea to get a basic idea of how taxes work in the United States.

The basics
Taxpayers are typically divided into 7 tax brackets based on their net taxable income. The tax brackets are separated into percentages. So, the 7 current tax brackets you’re looking at are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

The US tax system is progressive. What that means is that you end up paying more taxes as your income grows. So, the highest earners pay almost 40% of their income as tax. Of course, this doesn’t mean high earners pay the same rate all the time.

For instance, in the 2018 tax plan, single individuals are required to pay the 37% tax rate only if they are earning over $500,000 or more. So, if their annual income falls short even by a dollar, they are only subject to a 35% tax.

A deeper look
Tax brackets were primarily established to ensure a certain amount of fairness in tax payments. For instance, a fixed tax rate would likely end up causing an imbalance. If the tax rates are too low to benefit the low-earners, it would prevent the high earners from contributing more. If the tax rates were too high, it would end up putting low earners at a disadvantage.

By ensuring that certain groups of earners pay only an appropriate amount of tax, tax brackets create a system of fairness. So, if you’re a single individual earning about $9,525 annually, you are subject to a 10% tax rate, whereas someone earning $500,000 or more will have to currently pay almost 40% as taxes.

Effective tax rate
The tax brackets only set a range of sorts for each income group. For instance, those earning anywhere from $157,500-$200,000 pay 32% as tax. As you can see, this only mentions a range. The actual tax that you pay based on your exact income is called the effective tax rate.

Also, your effective tax rate could end up being higher, irrespective of which tax bracket you fall into. As you might know, not everybody has a single source of income. Some people earn an income from their investments such as stocks, shares, and even property.

So, it’s possible that one’s salary might be subject to a different tax rate whereas, let’s say, income from rent might be subject to a different tax rate. So, the actual amount of money you pay as taxes could be a lot more than your effective tax rate.

Deductions
The good news is that you can always reduce the amount of tax you pay via deductions. Deductions are basically expenses that are tax exempt. So, what happens at the end of the day is that you pay tax for a much lower income figure than the actual figure.

For instance, if you fall in the 32% tax bracket, you can claim up to $6,350 as standard deduction. What this means is you’re essentially paying taxes on your income minus the $6350, which results in overall lower taxes.

Standard deductions are deductions that all taxpayers are permitted to in the US. What standard deductions do is that they allow you to subtract $6,350 from your overall income.

This is an alternative to itemized deductions where you’re required to calculate each and every tax-exempt expenditure.

There are several other types of deductions that can benefit you in similar ways.

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