Taxes, tax brackets, tax rates – yuck. I know this stuff isn’t a lot of fun. Unfortunately, however, tax brackets & tax rates are often misunderstood. A lot of people think that your tax rate is the same as your tax bracket.
What? They aren’t the same thing?!
Well, now you’re probably thinking some variant of “WTF is a tax bracket?”. Thankfully, it’s a lot more simple than you think! Read on to figure out both your tax bracket AND your tax rate!
What is a tax bracket?
The US uses a progressive tax system. What that means is as you earn more money, Uncle Sam takes a bigger cut of your income.
But how do you figure out what cut they take?
You start off with the tax bracket. Tax brackets are income ranges that have their own tax range. People who make less money will fall into a lower tax bracket than people who make more money.
The brackets range from 10% for the lowest income earners to 37% for those that make a TON of money.
Curious how these brackets break out? Check it out here. You’ll notice that the tax brackets vary depending on how you file your taxes. For this blog post, I’m going to assume we’re filing as single. If you’re curious about what the other filing statuses are, you can read more about US taxes here.
Say you make $40,000 as a single person. You look at the nifty tax bracket and find out you’re in the 22% bracket.
What?! Is the government going to take over a fifth of your income?!
Nope. That’s a common misconception.
How is a tax bracket different from a tax rate?
So you’re in the 22% bracket. How do you figure out your tax rate?
Well, the brackets have ranges. For 2019, what that means is:
- All your income up to $9,699 is taxed at 10%.
- Everything between $9,700 – $39,474 is taxed at 12%.
- Everything between $39,475 – $40,000 is taxed at 22%.
Great. That doesn’t clear much up, does it?
How do we figure out our effective tax rate?
First off, you need to subtract the standard deduction from your total income. The “standard deduction” is the government’s way of saying “we’re sure you did some things that reduced the taxes you owe us, so deduct this from your income.”
For 2019, the standard deduction is $12,200 for individuals. This means your taxable income is $27,800!
Ok, now what? Does that mean my tax rate is 12%? Not quite. Remember, that’s your bracket, not your effective rate.
To figure out your effective rate we will calculate how much money from each chunk is taken out and then figure out what percentage of all your income is taken out. Voila, your effective tax rate!
You may fall into the 22% tax bracket, but when you deduct the standard deduction that puts you in the 12% bracket. When you use the brackets to calculate your effective tax rate it comes out to 7.85%! MUCH better than 22%, amiright?
That’s the main difference between a tax bracket and a tax rate: the tax bracket tells you the highest tax rate some of your money is subject to and a tax rate figures out what percentage you actually pay, based on your bracket & income.
Calculate your tax rate
If you want to understand your effective tax rate without doing the calculations yourself, check out this awesome tool! It’s only updated for 2018 taxes, but it’s pretty close and the best tool I’ve found.
It automatically deducts the correct standard deduction so you don’t have to remember to do it.
There will be some questions that seem complex if you don’t know much about taxes, so to just understand your effective tax rate, I recommend you enter:
- Your income + any expected commissions or bonus
- Your city (to include state taxes)
- Your filing status (if you live on your own and are not married, you’re filing single)
Scroll down to Federal and look across to Effective. Effective will show you what you actually pay and marginal will show you what bracket you fall in!
Keep in mind, there are other taxes or tax-like fees you have to pay beyond the federal income tax. Some of those include Social Security, Medicare, state taxes, etc. You can see those on the calculator above:
- FICA is Federal Insurance Contributions Act. It’s what you have to pay into for Social Security and Medicare.
- State & local taxes are dependent upon where you live. Texas, for instance, has no state income tax but Colorado does.
If you click on the Advanced tab on the calculator, you can put in more complex calculations like 401(k) and IRA contributions!
Summary – tl;dr
Your tax bracket tells you the highest tax rate some of your income will be subject to.
You gotta deduct the standard deduction still!
After some calculations (using the tax brackets!) you will come up with your effective tax rate – what the Federal Government takes from your income – but this is only the federal income tax.
Other chunks of money you’ll owe may include state taxes and DOES include things like Medicare and Social Security.
As usual, if you have more questions, shoot me an email! Check out the contact page above. And Happy Tax Season!