The US federal income tax system is designed so that as you earn more, a higher portion of your income is taxed at higher rates. This doesn’t mean all your money is taxed at the highest bracket; instead, income is taxed in tiers. These tiers, known as tax brackets, are updated annually to account for inflation and sometimes, legislative changes. Understanding how they work is crucial for effective tax planning.
How Tax Brackets Work: A Tiered System
The US operates a progressive tax system. This means that different portions of your income fall into different tax brackets. For example, if you earn $75,000, some of that income may be taxed at 10%, some at 12%, and the remainder at 22%. Only the portion of your income exceeding a certain threshold enters the next bracket.
Marginal vs. Effective Tax Rate: These terms are often confused. The marginal rate is the tax rate on your last dollar earned. The effective rate is the average tax you pay across all your income, considering lower brackets and deductions. The effective rate is almost always lower than your highest marginal rate.
2026 Tax Brackets: An Overview
The following brackets apply to income earned in 2025, filed in 2026. These numbers are subject to change with legislation but are current as of late 2024.
| Filing Status | Income Range | Tax Rate |
|---|---|---|
| Single | $0 – $11,600 | 10% |
| Single | $11,601 – $47,150 | 12% |
| Single | $47,151 – $100,525 | 22% |
| Single | $100,526 – $191,950 | 24% |
| Married Filing Jointly | $0 – $23,200 | 10% |
| Married Filing Jointly | $23,201 – $94,300 | 12% |
| Married Filing Jointly | $94,301 – $201,050 | 22% |
These thresholds and rates are updated annually by the IRS.
Calculating Taxable Income
Your tax liability isn’t based on your gross income. It’s based on your taxable income. This is calculated by subtracting deductions from your gross income.
Deductions: The most common is the standard deduction, a set amount that varies by filing status. If you have eligible expenses (mortgage interest, charitable donations, etc.), you may itemize instead.
Example: A single filer with $65,000 in gross income and a standard deduction of $14,600 will only pay taxes on $50,400.
Real-World Tax Scenarios
Consider two examples:
-
Mid-Income Single Filer ($75,000 Gross): After standard deductions, their taxable income is $60,400. While the top marginal rate may be 22%, the effective tax rate will be around 14%, with an estimated tax owed of roughly $8,500.
-
Higher-Income Filer ($180,000 Gross): With deductions, their taxable income is $165,400. The marginal rate may be 24%, but the effective rate will be closer to 19%, with an estimated tax owed of around $31,500.
Tax Planning Strategies
To minimize your tax burden:
- Maximize Retirement Contributions: 401(k) and IRA contributions reduce taxable income.
- HSA Contributions: Health Savings Accounts offer triple tax advantages.
- Strategic Timing: If possible, defer income to lower-income years.
- Claim All Credits: Ensure you claim eligible tax credits.
Why Tax Brackets Change
Tax brackets are adjusted yearly to prevent bracket creep —where inflation pushes taxpayers into higher brackets even if their purchasing power hasn’t increased. Legislation can also alter tax brackets. Additionally, standard deductions are increased to keep pace with rising living costs.
In conclusion, the US tax system is progressive, meaning that income is taxed in tiers. Understanding these tiers and how taxable income is calculated is vital for effective financial planning. By maximizing deductions and contributions, you can potentially reduce your tax liability while still complying with the law.
