Tax brackets are the tax rates that apply to a specific range of incomes. Each tax bracket is associated with its own rate, which can vary depending on the jurisdiction where the individual or business resides. Tax brackets are used to calculate how much a taxpayer owes in taxes and can help taxpayers understand how much they owe at different levels of income.
In the United States, there are seven federal income tax brackets, ranging from 10% to 37%. The amount of your taxable income that falls within each individual bracket determines your tax rate. For example, if your taxable income is $60,000, your tax rate would be 22%. This means that you would owe 22% of your income in taxes.
Tax brackets exist to ensure that those with higher incomes pay higher amounts of taxes. Moreover, they help to evenly distribute the tax burden across the population. Taxpayers can take advantage of several deductions and credits that can help them reduce their taxable income. Lowering their taxable income can also help them move into a lower tax bracket and reduce their taxes.
Example of a Tax Bracket in Action
To understand how tax brackets work, take a look at the following example. Assume that a business earned $50,000 in taxable income in 2022. In the United States, the corresponding tax bracket for this income level would be 12%. That means that the business would pay $6,000 in taxes in 2022.
Now assume that the business generated $60,000 in taxable income in 2022. In that year, the corresponding tax bracket jumped to 22%. This means that the business would owe $13,200 in taxes (22% of $60,000) in 2022. The higher level of taxable income moved the business into a higher tax bracket, resulting in a larger tax bill.
Conclusion
Tax brackets are a useful tool to help individuals and businesses understand their tax liabilities. Tax brackets exist to ensure that those with higher incomes pay a greater amount of taxes. By reducing their taxable income through deductions and credits, taxpayers can ensure that they are paying their fair share in taxes and working to keep their tax bill as low as possible.