What are Tax Brackets and How to Calculate Them [2023]

Tax brackets are the very factor determining just how much is withheld from your earnings for taxes.

The US uses a progressive tax system and presently has seven federal tax brackets. These tax brackets have rates that range from 10% to 37%.

If all this basic tax information still leaves you confused or clueless, then take this time to check out this article and find out all about tax brackets for 2023!

Key Takeaways

• Tax brackets comprise a range of taxable income and tax rates.
• For 2023, the IRS uses the same seven tax rates implemented during the 2022 tax year, namely: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
• Tax rates are percentages imposed on a range of taxable income that increase as salaries and wages increase.
• Filing status are classifications of taxpayers based on their marital status.
• Tax brackets alleviate the tax burdens from low-income families, enable distributed tax deductions, reward taxpayer behavior, etc.
• Tax brackets can be lowered through the use of tax credits and tax deductions.

What are Tax Brackets?

Tax brackets are composed of a series of different incomes, each with a corresponding rate for income taxes. They are used as the basis for determining the amount of tax imposed on employee wages and salaries.

The US uses a progressive tax system. The higher a taxpayer’s income is, the higher tax rates they are obligated to pay. Conversely, lower incomes are subject to lower tax rates.

The progressive tax system also goes hand-in-hand with the implementation of a marginal tax rate, which explains why tax rates exhibit an upward or downward trajectory based on how big or how little an individual’s gross earnings are.

On the other hand, if everyone is charged the same rate for their taxes, then a flat tax rate is imposed on their income. Flat tax rates are more common in state income taxes and in more progressive countries.

With a flat tax rate, everybody is levied the same tax rate regardless of how much they make.

Tax brackets are conditional in that the IRS adjusts them based on the yearly inflation rate. The 2022 and 2023 tax years use the same seven federal tax brackets.

The seven tax brackets are segmented into the following tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%, respectively.

Difference Between Tax Rates and Tax Brackets

The main distinction between tax rates and tax brackets is that tax brackets consist of tax rates imposed on a sequence of low to high incomes. Under tax brackets, the values are subdivided into income range, tax rates, and filing status.

Filing status comprises different classifications based on taxpayers’ marital statuses that determine the tax rates along with the type of tax return forms they must submit.

There are five filing statuses, namely:

• #1. Single
• #2. Married Filing Separately
• #3. Married Filing Jointly
• #4. Head of Household
• #5. Qualifying Widow/Widower with Dependent Child.

Tax rates refer to the percentage of your wage or salary withheldor paid for tax purposes. It shows the actual taxable amount from your earnings.

2023 Tax Brackets [Due April 2024]

The following are the tax brackets used by the IRS for the year 2023. These tax brackets apply to taxes due in April 2024.

#1. Single Filers

#2. Married Couples Filing Jointly

#3. Married Couples Filing Separately

#4. Head of Household Filers

#5. Qualifying Widow/Widower with Dependent Child

The Qualifying Widow or Widower With Dependent Child filing status allows a surviving spouse to use the Married Filing Jointly tax bracket on their individual tax return. To qualify for this bracket, the surviving spouse must not remarry for at least two years after the death of their marriage partner.

The Qualifying Widow/Widower tax bracket is valid for up to two years following the death of the spouse.

History of Tax Brackets

Tax brackets have existed since the very first forms of income taxes were introduced and implemented. At that time, the Union government had to generate sources of funding for the ongoing civil war.

The Revenue Act of 1861 was first passed and was succeeded by the Revenue Act of 1862. The latter formed the first two tax brackets, a 5% tax rate on incomes amounting to more than $10,000 and a 3% tax rate for incomes that range from $600 to $10,000.

There were only four filing statuses then: Single, Married Filing Jointly, Married Filing Separately, and Head of Household. Tax brackets have undergone several changes—spanning a huge jump from seven brackets to 56, implementing tax rates that went as high as 77% to 94%, and the Tax Reform Act of 1986, which reduced the tax rates and streamlined the tax brackets.

The current tax system uses seven tax brackets.

Pros and Cons of Tax Brackets

Every system has its faults and strong points. Similarly, the current progressive tax system imposed by the federal government has its own share of pros and cons.

Tax Brackets Pros

• #1. Higher-income yields higher taxes. In other words, higher tax rates are imposed on individuals who are likely more financially capable of paying them. Compared to a flat tax rate that charges the same rate regardless of the taxpayers’ salary or wage, tax brackets distribute the deductions and credits on taxable income, making the final withholding amount more bearable.
• #2. Distributed deductions and positive reinforcement. Speaking of distributed deductions, tax brackets come with rewards and positive reinforcement for good taxpayer behavior. For instance, the American Opportunity Tax Credit for students promotes better educational opportunities. On another hand, the Earned Income Tax Credit and Child Tax Credit both provide financial relief for parents and low to moderate-income families.
• #3. Generate higher revenue for government programs. The government uses federal, state, and local income taxes to fund various programs to benefit the general public. Tax brackets and progressive tax systems create multiple sources to finance health, public safety, retirement programs, etc.

Tax Brackets Cons

• #1. Deterrent to financial progress. At first glance, it might seem more plausible to tax wealthier taxpayers more. However, when you look at it from the perspective of an aspiring entrepreneur or an employee who now makes more money following a promotion, it doesn’t seem fair to simply demand more tax responsibilities just because they make more money and take on heavier job roles.
• #2. Invitation for tax loopholes. Since wealthier taxpayers shoulder higher taxes, the chances are they will gladly try to find their way around the tax system in hopes of finding a loophole to reduce their tax rates. Long-term capital gains are an excellent example of a tax loophole that the rich can use to their advantage. It effectively paves the way for lower preferential rates based on their sale of assets and properties.
• #3. Inflation and bracket creep. Higher inflation rates expand the tax rates, push higher amounts of income taxes withheld, and render the financial relief of deductions and tax exemptions almost ineffective.

How to Calculate Your Federal Income Tax Bracket

If you’re wondering how to calculate your federal income tax bracket, let’s use the tax brackets for 2023.

For this example, let’s say you fall under the Head of Household filing status, who earns a taxable income amounting to $50,000. Under the 2023 federal income tax brackets rates used by the IRS, you will be taxed at 10% for the first $15,700 of your $50,000 salary.

Next, you will also be taxed 12% of the excess amount between $15,701 and $59,850. Finally, your $50,000 taxable income will also fall under the 22% tax rate because the said rate includes the taxable income bracket ranging from $59,851 to $95,350.

Here’s a breakdown of the amassed tax amounts based on the example above, considering that your filing status is Head of Household and your taxable income is $50,000:

• 10% of $15,700: $1,570
• 12% of the excess amount between $15,701 and $59,850 ($44,149): $5,297.88
• 22% of the 50,000 (for this part, you’d have to subtract the 50,000 from 59,851): $2167.22

Next, all you have to do is add all the accumulated tax rates to yield a total tax amount of $9,035.

How to Get Into a Lower Tax Bracket

Taxes can be quite burdensome now that the current inflation has increased the income tax rates. Fortunately, there are some ways you can reduce your tax withholdings through the use of tax credits and tax deductions.

#1. Tax Credits

Tax credits are excellent at diminishing your taxes due dollar for dollar. These rewards granted by the federal government help manage costs in education, child care, and even home improvement.

Some examples of tax credits include the Child Tax Credit and the American Opportunity Tax Credit (AOTC). The Child Tax Credit is a non-refundable type of tax credit, meaning that it can only reduce your tax liability for as long as it does not exceed your taxes owed.

You can claim up to $2,000 worth of refundable tax credits per qualifying child or dependent with CTC.

The American Opportunity Tax Credit is a partially refundable tax credit for students in postsecondary education who are pursuing a degree or any other recognized educational certificate. If you are a student who is eligible for the AOTC, the key to lowering your tax bracket is to ensure your tax liability is down to $0.

The remainder of the $2,500 tax deduction in your AOTC may then be claimed as a refundable credit.

#2. Tax Deductions

The IRS offers standard deductions for each taxpayer. This year, the standard tax deductions amount to $13,850. Tax deductions diminish your taxes owed on your taxable income based on your contributions to benefits and retirement plans like 401(k), for example.

Make sure to document and itemize all your contributions. It would also be helpful to choose whether to use the standard deductions or opt for individual deductions to manage your tax liability instead.

What Were the Federal Tax Brackets for 2022?

In 2022, the federal tax brackets comprised seven tax rates, which are still applied to the tax brackets for 2023. Despite that, a clear detail that distinguishes the two tax brackets is that for 2023, certain adjustments had to be made yet again due to inflation.

Single filers earning a taxable income of over $539,900 were at the receiving end of the highest tax rate of 37%, while married couples filing jointly with a reported taxable income of over $647,850 experienced the highest withholdings in their taxes.

Check out the table below for comparison:

Final Thoughts

Taxes are an integral part of adulting, especially when you are already earning a significant amount of income. It pays to know how these taxes are deducted from your hard-earned wage or salary.

In this manner, you get to deduce whether your tax contributions go straight to programs that benefit you and society as a whole. Moreover, you get a clearer idea as to the extent of your tax liabilities and any deductions or refundable credits you may be entitled to.