Tax Brackets 101: How Your Taxes are Calculated

Financial Learning | March 17, 2022 | 3 minutes read

One of the most important tax-related concepts is tax brackets. Tax brackets are a system used by the Internal Revenue Service (IRS) when calculating your annual income taxes. The amount you owe depends on your income, marital status, household size, and other important factors.

Let’s take a closer look at how tax brackets work so you can make an informed tax filing this year.

What are Tax Brackets?

Tax brackets are a method used to figure out how much you owe in taxes. In the United States, the IRS uses a progressive tax bracket system where people with a higher income pay a higher percentage of their income in taxes. Those with a lower income pay a lower percentage of their income in taxes.

You can use tax software like TurboTax or free resources from the IRS to figure out your tax bracket. If your income grows, you will move into a higher income tax bracket. That doesn’t mean you pay that higher rate on all of your income, however. The IRS will only tax the additional income at a higher rate. In other words, it doesn’t matter if you make $10,000 per year or $10 million. The first $5,000 you earn every year is taxed at the same rate.

When looking at a table showing tax brackets, remember that the tax rate you see is your top tax rate based on your income. Your effective tax rate, which is how much you really pay, is most likely lower than your top tax bracket.

Tip: Did you know that Payactiv members get up to $15 off TurboTax?

Progressive vs. Flat Tax Rates

You might have heard common arguments about progressive tax rates versus flat tax rates. Some states use a flat tax for state income taxes, so it’s good to understand the difference

With a flat tax, everyone pays the same tax rate regardless of their income. If you live on an income below $30,000 per year, you would pay the same percentage of your income in taxes as someone who makes $300,000 per year (or any other amount). If the flat tax rate is 5%, for example, 5% of your income would go to taxes at all income levels.

Under a progressive tax system, which we use for Federal taxes, those with a higher income pay a higher percentage of their income. This system taxes new income at a higher rate but doesn’t go back and raise your tax rate on income earned earlier in the year.

2021 Tax Brackets (For Taxes Submitted in 2022)

For your 2021 earnings, these are the tax brackets used for single and married filers. Check out the separate brackets for married filing separately and head of household tax returns. Don’t forget to mark your calendars on Monday April 18th, 2022, which is when taxes are due.

SINGLE FILER

Single Filer Income	Tax Rate	Tax Calculation
$0 to $9,950	10%	10%
$9,951 to $40,525	12%	$995 plus 12% of income over $9,950
$40,526 to $86,375	22%	$4,664 plus 22% of income over $40,525
$86,376 to $164,925	24%	$14,751 plus 24% of income over $86,375
$164,926 to $209,425	32%	$33,603 plus 32% of income over $164,925
$209,426 to $523,600	35%	$47,843 plus 35% of income over $209,425
$523,601 or more	37%	$157,804.25 plus 37% of income over $523,600

MARRIED FILING JOINTLY

Married Filing Jointly Income	Tax Rate	Tax Calculation
$0 to $19,900	10%	10% of taxable income
$19,901 to $81,050	12%	$1,990 plus 12% of income over $19,900
$81,051 to $172,750	22%	$9,328 plus 22% of income over $81,050
$172,751 to $329,850	24%	$29,502 plus 24% of income over $172,750
$329,851 to $418,850	32%	$67,206 plus 32% of income over $329,850
$418,851 to $628,300	35%	$95,686 plus 35% of income over $418,850
$628,301 or more	37%	$168,993.50 plus 37% of income over $628,300

Deductions and Credits Lower Your Taxes

Two methods of lowering your taxes are deductions and credits. Deductions lower your taxable income used when calculating your taxes. For 2021, every single filer gets a standard deduction of $12,550, and married couples get a $25,100 standard deduction.

If you have enough allowed deductions, including deductions for mortgage interest, you may get to deduct more than the standard deduction using a method called itemized deductions. Your tax preparer or tax app can tell you which makes more sense for your situation.

If you are a married couple who earns a total of $40,000 per year, for example, you could subtract $25,100 from your income when calculating your taxes. In this situation, you would pay taxes as if you made $14,900 per year, which puts you in the lowest 10% tax bracket.

Credits lower your total taxes due directly. If your calculated annual taxes total $3,000 and you have $1,000 in credits, your taxes would be lowered to $2,000.

It’s Important to Be an Educated Taxpayer

There are enough numbers in this post to make anyone’s head spin, which is why tax software like Payactiv partner TurboTax can be a lifesaver. TurboTax takes care of the numbers so you can focus on educating yourself about taxes on a higher level.

Now that you know how your tax brackets work, you can better estimate your annual taxes and have resources to double-check that your results seem reasonable. If they do, you likely have an accurate tax return.

Now it’s time to file your taxes and don’t forget to reward yourself afterwards. Cheers, and Happy Tax Season!