However you make your money -- by working or by investing -- you can pretty much count on owing taxes to the federal government. In most places you will also owe taxes to your state government, too.
For now, though, let's just consider your federal tax bite on common forms of income.
Income taxes: Your "earned" income -- that which you make by working -- will be taxed on a graduated scale.
There are 7 income tax rates: 10%, 15%, 25%, 28%, 33%, 36% and 39.6%.
The first dollar you make will be taxed at the 10% rate while the last dollar you make likely will be taxed at a higher rate. The more you make, the higher your top rate will be.
For example, in 2015, if your taxable income is $65,000 and you're single, you'll be in the 25% bracket. You'll owe 10% on the first $9,225 of your income, 15% on the next $28,225 and 25% on the rest.
Remember, your taxable income is not your gross income. It generally reflects your gross income minus any deductions, credits and exemptions you may claim.
So if you gross $100,000, your taxable income might be closer to $80,000.
Social Security and Medicare taxes: Payroll taxes -- or FICA taxes as they're also called -- are intended to fund the two biggest U.S. safety net programs.
You will owe 12.4% in Social Security tax on the first $118,500 of your earned income. (That income threshold is for 2015; it's adjusted for inflation every year.)
If you're an employee, you'll pay 6.2% of that and your employer will pay the other 6.2%.
If you're self-employed, you'll pay the full 12.4% but may deduct half of it on your tax return as a business expense.
You'll owe another 2.9% in Medicare taxes on all of your earned income. Again, if you're employed, you'll pay half (1.45%) while your employer will pay the other half.
If you're a very high income earner, you'll owe an additional 0.9% on the amount over $200,000 ($250,000 if married). So you'd end up paying 1.45% on the first $200,000 and 2.35% on the rest.
The 0.9% Medicare surtax is a recent change and is intended to help pay for health reform.
Investment income taxes: Capital gains, dividends and interest represent "unearned income."
Generally speaking, interest -- say from a savings account -- is taxed at regular income tax rates.
But you'll pay a lower rate for capital gains and dividends on investments you've held at least a year. How much lower depends on your overall income.
For most people, the long-term capital gains and dividend tax rate is 15%.
But it goes up to 20% for households making more than $200,000.
Those same high-income households may also have to pay a 3.8% Medicare surtax on some of their capital gains and dividends, another measure intended to help pay for health reform.
Income from investment properties (e.g., a vacation rental you own) is also subject to ordinary income tax.
CNNMoney (New York) First published May 28, 2015: 4:19 PM ET
Updated tax brackets for the year 2020
Your bracket shows you the tax rate that you will pay for each portion of your income. For example, if you are a single person, the lowest possible tax rate of 10 percent is applied to the first $9,525 of your income in 2020. The next portion of your income is taxed at the next tax bracket of 12 percent. That continues for each tax bracket up to the top of your taxable income.
The progressive tax system ensures that all taxpayers pay the same rates on the same levels of taxable income. The overall effect is that people with higher incomes pay higher taxes.
What bracket are you in, and what does that really mean?
Your tax bracket, roughly speaking, is the tax rate you pay on your highest dollar of taxable income. It is not the tax rate you pay on all of your income after adjustments, deductions, and exemptions. Your bracket only determines your individual income tax rates for each additional dollar of income (ignoring the effects of rounding.)
We have federal tax brackets in the U.S. because we have a progressive income tax system. That means the higher your income level, the higher a tax rate you pay. Your tax bracket (and tax burden) becomes progressively higher.
In a progressive tax system, rates are based on the concept that high-income taxpayers can afford to pay a high tax rate.
Low-income taxpayers pay not just lower taxes overall, but a lower percentage of their income within this tax system.
Say you’re single with no dependents, and your taxable income is $9,000. Your marginal tax rate, according to the Federal Income Brackets chart below, is 10 percent. You pay $900 in income tax. That’s simple.
What if your taxable income is $19,000?
As a Single filer, you’re now in the 12 percent tax bracket. That doesn’t mean you pay 12 percent on all your income, however.
You pay 10 percent on the first $9,525, plus 12 percent of the amount over $9,525.
Here’s the math:
| First tax bracket: $9,525 X 10% = | $952.50 |
| Second tax bracket: ($19,000 – $9,525) X 12% = | $1,137.00 |
| Total income tax: | $2,089.50 |
What if your taxable income is $115,000?
As a Single filer, you moved up to the 24 percent bracket, so things get a bit more complicated. In this case:
You pay 10 percent on the first $9,525
plus 12 percent of the amount between $9,526 and $38,700
plus 22 percent of the amount between $38,701 and $82,500
plus 24 percent of the amount over $82,501.
Here’s the math:
| First tax bracket: $9,525 X 10% = | $952.50 |
| Second tax bracket: ($38,700 – $9,525) X 12% = | $3,501.00 |
| Third tax bracket: ($82,500 – $38,700) X 22% = | $9,636.00 |
| Fourth tax bracket: ($115,000 – $82,500) X 24% = | $7,800.00 |
| Total income tax: | $21,889.50 |
Find your bracket in the following chart based on your filing status and 2020 income:
Federal Income Tax Brackets
2020 Tax Brackets
| 10% | $0 to $9,525 | $0 to $19,050 | $0 to $9,525 | $0 to $13,600 |
| 12% | $9,526 to $38,700 | $19,051 to $77,400 | $9,526 to $38,700 | $13,601 to $51,800 |
| 22% | $38,701 to $82,500 | $77,401 to $165,000 | $38,701 to $82,500 | $51,801 to $82,500 |
| 24% | $82,501 to $157,500 | $165,001 to $315,000 | $82,501 to $157,500 | $82,501 to $157,500 |
| 32% | $157,501 to $200,000 | $315,001 to $400,000 | $157,501 to $200,000 | $157,501 to $200,000 |
| 35% | $200,001 to $500,000 | $400,001 to $600,000 | $200,001 to $300,000 | $200,001 to $500,000 |
| 37% | $500,001 or more | $600,001 or more | $300,001 or more | $500,001 or more |
2017 Tax Brackets
| 10% | $0 to $9,325 | $0 to $18,650 | $0 to $9,325 | $0 to $13,350 |
| 15% | $9,326 to $37,950 | $18,651 to $75,900 | $9,326 to $37,950 | $13,351 to $50,800 |
| 25% | $37,951 to $91,900 | $75,901 to $153,100 | $37,951 to $76,550 | $50,801 to $131,200 |
| 28% | $91,901 to $191,650 | $153,101 to $233,350 | $76,551 to $116,675 | $131,201 to $212,500 |
| 33% | $191,651 to $416,700 | $233,351 to $416,700 | $116,676 to $208,350 | $212,501 to $416,700 |
| 35% | $416,701 to $418,400 | $416,701 to $470,700 | $208,351 to $235,350 | $416,701 to $444,550 |
| 39.60% | $418,401 or more | $470,701 or more | $235,351 or more | $444,551 or more |
Find out which IRS tax bracket you are in. Estimate your tax rate with our tax bracket calculator. If you’re wondering how much you’ll save after the tax reform bill, check out our Tax Cut & Jobs Act calculator.
Busting a tax bracket myth
Some people think if they earn more money, they are in a higher tax bracket. They believe they pay more taxes and may actually have less money left over than they would if they had earned less.
Using the example above, you can see that’s not true.
Each dollar you earn only affects the tax rate and taxes owed on additional income. It does not change the rate applied to dollars in lower brackets.
Unless you are in the lowest bracket, you actually have two or more brackets. If you are in the 24 percent tax bracket, for example, you pay tax at four different rates – 10 percent, 12 percent, 22 percent, and 24 percent.
Based on the tax brackets, you always have more money after taxes when you earn more. But, of course, rates are not the only factor in your final tax bill. You can lose tax benefits that phase out at higher income levels, such as education for higher education. In some tax scenarios, it might make sense to avoid higher tax brackets if possible.
It pays to use TaxAct as a planning tool to see how different levels of income affect your tax benefits and final tax bill.
Use the tax code to make better decisions
Let’s say you’re considering working overtime and making an additional $1,000 in a year.
If you know you’re in the 24 percent tax bracket, you’ll pay $240 in income tax on that extra money.
You’ll also pay 7.65 percent in Social Security and Medicare employee withholding, plus any state tax and other mandatory withholding.
Earning an additional $1,000 is a great idea, but don’t be surprised when you discover that one-third or more of your pay goes to taxes.
If you’re contemplating making a charitable contribution before the end of the year, knowing your income tax bracket and filing status can help determine how much your contribution will save you in taxes. However, that’s assuming you will itemize your deductions.
For example, if you’re in the 22 percent tax bracket, every $100 you contribute to charity saves you $22 in federal income taxes.
Knowing your tax rate also helps when you’re thinking about making retirement plan contributions. If you contribute to a traditional 401(k) plan or traditional IRA, you’ll reduce your state and federal income tax. In turn, that makes your contribution more affordable.
- 5 Ways to Avoid Bumping Your Income into a Higher Tax Bracket
- How Retirement Contributions Impact Your Tax Bill
- Reduce Your Taxable Income With a 401(k)