The amount of federal income tax you pay depends on your tax bracket and your income.
A lot of people don't know what they are, though - let alone how they work or how to use them to advantage.
But understanding the seven federal tax brackets can help you plan a more effective tax strategy so you keep more money in your pocket.
What Are The Federal Income Tax Brackets?
Tax brackets are tiers. Each tier is a range of income, and the government taxes each of those tiers at a different rate. The amount of tax you pay depends on these factors:
- Filing status (single, married filing jointly, married filing separately, and head of household)
- Your taxable income
- The federal income tax rate the government assigns to your tax bracket
Your taxable income is the figure the government uses to determine the taxes you owe.
You start with your total income and may apply certain adjustments (like alimony paid or retirement account contributions) to determine your adjusted gross income, or AGI.
From the AGI, you'll subtract the itemized deductions from your Schedule A, or a "standard deduction" supplied by the IRS - whichever leaves you with the least amount of taxable income.
There are currently seven brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The income ranges these brackets apply to will change in the 2020 tax year but the percentages will not.
2019 Federal Income Tax Brackets
The chart below illustrates the 2019 U.S. income tax brackets which apply to the returns that Americans will file before the July 15, 2020 deadline. (Normally the filing deadline is April 15; but this year, the IRS extended it due to the coronavirus pandemic.)
Note: 2019 federal income tax brackets for taxes due July 15, 2020, or October 15, 2020 with an extension.
|Tax rate||Single filers||Married filing jointly*||Married filing separately||Head of household|
|10%||$0 - $9,700||$0 - $19,400||$0 - $9,700||$0 - $13,850|
|12%||$9,701 - $39,475||$19,401 - $78,950||$9,701 - $39,475||$13,851 - $52,850|
|22%||$39,476 - $84,200||$78,951 - $168,400||$39,476 - $84,200||$52,851 - $84,200|
|24%||$84,201 - $160,725||$168,401 - $321,450||$84,201 - $160,725||$84,201 - $160,700|
|32%||$160,726 - $204,100||$321,451 - $408,200||$160,726 - $204,100||$160,701 - $204,100|
|35%||$204,101 - $510,300||$408,201 - $612,350||$204,101 - $306,750||$204,101 - $510,300|
|37%||$510,301 or more||$612,351 or more||$306,751 or more||$510,301 or more|
2020 Federal Income Tax Brackets
You'll notice that, in 2020, you'll be able to earn a bit more before being bumped into a higher income tax bracket. That is normal, usually to account for inflation.
Note: 2020 federal income tax brackets for taxes due April 15, 2021, or October 15, 2021 with an extension.
|Tax rate||Single filers||Married filing jointly*||Married filing separately||Head of household|
|10%||$0 - $9,875||$0 - $19,750||$0 - $9,875||$0 - $14,100|
|12%||$9,875 - $40,125||$19,751 - $80,250||$9,876 - $40,125||$14,101 - $53,700|
|22%||$40,126 - $85,525||$80,251 - $171,050||$40,126 - $85,525||$53,701 - $85,500|
|24%||$85,526 - $163,300||$171,051 - $326,600||$85,526 - $163,300||$85,501 - $163,300|
|32%||$163,301 - $207,350||$326,601 - $414,700||$163,301 - $207,350||$163,301 - $207,350|
|35%||$207,351 - $518,400||$414,701 - $622,050||$207,351 - $311,025||$207,351 - $518,400|
|37%||$518,401 or more||$622,051 or more||$311,026 or more||$518,401 or more|
Important 2020 Tax Deadlines
On March 20, the IRS pushed back the April 15 tax-filing deadline to July 15, 2020 due to the economic fallout of the coronavirus outbreak. The 90-day extension gives taxpayers and tax preparers more time to prepare their tax returns and pay 2019 taxes.
The schedule for 2020 estimated tax payments has been delayed too. The first and second estimated tax payments for income earned between January 1 and May 31, 2020, is now due July 15, 2020. The third and fourth estimated tax payments deadlines were not changed.
If you need more time to prepare your taxes, you can request an extension of the filing due date by submitting Form 4868 to the IRS by July 15, 2020. The due date for filing your 2019 tax return if an extension is granted is still October 15, 2020.
How Tax Brackets Work
It's important to understand that the tax bracket into which your overall income falls does not apply to all of your taxable income - only the amount that exceeds the ceiling of the bracket below.
For example, if your taxable income is $100,000 and you're a single filer, you are in the 24% bracket. But you won't pay $24,000 in federal taxes.
Here's what you'll pay:
- 10% on the first $9,875 ($987.50)
- 12% on the next $30,250 ($3,630)
- 22% on the next $45,399 ($9,987.78)
- 24% on the last $14,475 ($3,474)
The total taxable income is $100,000, but the total taxes paid is $18,079.28. So in reality, you're paying just over 18% in federal taxes.That's your effective tax rate.
Is it Bad to Move Into a Higher Tax Bracket?
Moving into a higher tax bracket means you're probably earning more money. And since you only pay a higher tax rate on income that exceeds the ceiling of your old tax bracket, a higher bracket won't leave you with less after-tax money.
However, you want to achieve the most after-tax income legally possible with good tax and investment planning. Borrowing can also be part of your tax-planning strategy.
How Deductions Lower Your Tax Bracket
Deductions are expenses that the IRS lets you subtract from your gross income to calculate your taxable income.
You can choose to take a standard deduction or itemize deductions on a Schedule A, whichever provides the lower taxable income.
Note that many deductions are subject to limitations. The medical expense deduction, for instance, has a 7.5% floor. That means you can only deduct qualifying medical costs that exceed 7.5% of your AGI.
Common itemized deductions include:
- Mortgage interest and mortgage insurance
(The maximum deduction amount is interest on up to $750,000 of debt if you're married and file jointly.)
- Medical and dental expenses (exceeding 7.5% of AGI)
- Charitable contributions
(For 2019, the CARES Act allows even those who don't itemize to deduct up to $300 from their taxable income.)
- Work-related education
(This is to keep your current position, like continuing education for licensing - not to improve your prospects.)
- State and local sales, property and income taxes
(The SALT deduction is capped at $10,000 for a married couple filing jointly.)
- Business use of your home
(This is the home office deduction.)
- Personal casualty losses
(This applies to federally declared disasters.)
Standard deductions for 2019 and 2020
The standard deductions for the 2019 and 2020 tax years are listed below. Your deduction depends on your filing status.
|Married Filing Jointly||$24,400||$24,800|
|Married Filing Separately||$12,200||$12,400|
|Head of Household||$18,350||$18,650|
Note that tax deductions on a Schedule A are different from business expenses that self-employed taxpayers take.
People often use the terms interchangeably, but there is a difference.
Reductions to taxable income taken on a business form like a Schedule C are expenses related to business activity. However, deductions on a Schedule A like mortgage interest and medical expenses have nothing to do with your source of income.
You may also reduce your taxable income with tax credits. Examples of tax credits include the Earned Income Credit for low-earning families and the Lifetime Learning Credit for education.
How Your Investments Affect Your Tax Bracket
The way you invest can affect your tax bracket too. Some investments are tax-deferred or tax-exempt.
Retirement accounts like the 401(k) and traditional IRA are tax-deferred. You deduct your contributions to the account from your income in the year you make the contribution, and you pay taxes on the money when you take a distribution. '
The advantage is that most of us are in lower tax brackets after retirement - and because the money grows without being taxed, you have more when you retire.
Tax-exempt investments include municipal bonds and bond funds. These are loans to local governments.
When evaluating tax-exempt investments, compare the after-tax returns. An investment that has the same amount of risk but is not tax-exempt will likely pay more. Tax-exempt investments benefit taxpayers in higher brackets more than those in lower brackets.
Borrowing can affect your tax bracket
Borrowing is also part of your tax plan.
Mortgage interest is tax-deductible, which makes borrowing less expensive - if you actually take the deduction.
If your standard deduction is higher, you won't deduct your mortgage insurance anyway - so don't count the savings when you run your numbers.
Sometimes borrowing can save you at tax time. For instance, you might consider withdrawing money from your 401(k) to meet an emergency expense. But if your tax bracket is 25%, and you could borrow with a personal loan at 10%, borrowing is a cheaper option.
Lowering Your Tax Bill: Dos and Don'ts
You don't have to be a financial genius to pay lower taxes. But there are mistakes to avoid.
|Lowering Your Tax Bill: Dos and Don'ts|
DO take some time every year for tax planning.
Withhold enough to avoid underpayment penalties, but don't over-withhold - that's just giving the IRS an interest-free loan.
DON'T spend just to get a tax deduction.
It's still spending, and you'll pay out more than you get back in tax savings.
DO compare tax-advantaged investments and taxable investments.
Choose the one with the best after-tax return for someone in your bracket. Most tax-exempt investments make sense only for those in higher brackets.
DON'T assume that itemizing will put you into the lowest tax bracket.
The 2017 Tax Cuts and Jobs Act raised the standard deduction significantly, and many who used to routinely itemize no longer do.
DO check the rules concerning any deductions you expect to take.
Many deductions have phase-outs that apply if your tax bracket is too high.
How Politics and Tax Law May Change What You Pay in 2020
The 2020 income tax brackets have been laid out. But tax laws and forms may change before it's time to file 2020 returns in 2021.
The government doesn't just use tax law to fill its coffers. It uses it to shape behavior - for instance, by giving preferential tax treatment to homeowners to encourage homeownership.
The fallout from the coronavirus pandemic that began in 2019 will not be fully known for some time. But emergency funds to states and industries and individuals, combined with the economic contraction as many sheltered in their homes, will likely push deficits to new highs.
As a results, tax rates could be raised to generate more revenue - or Americans could be encouraged to spend and heat up the economy with tax incentives.
Both strategies have their pros and cons for the economy, says the Tax Policy center at the Brookings Institution. High marginal tax rates can discourage citizens from working or saving. They can cause companies to cut back on investment and innovation. No one likes higher taxes, and most people prefer tax cuts. But tax cuts can harm economic growth in the long run by increasing deficits.
Previous Years' Federal Income Tax Brackets
In 1913, the highest federal tax rate was just 7% on income over $500,000 (equal to over $10 million today). The lowest bracket at the time was just 1% for income up to $20,000 per year.
But World War I caused taxes to jump from 15% in 2016 to 77% by 2018. Tax brackets were not exempt from global events then, and they likely won't be in the wake of COVID-19 today.
In the 1920s, the highest federal tax rates fell back to 25% -- until the Great Depression. Congress raised it to 63% for those still earning at the top of the food chain.
World War II saw the highest marginal tax rates in U.S. history - 94% at the top. Apparently, peace is cheap(er), and war is costly.
The next three decades saw the highest marginal tax rates fall, but never below 70%.
In the 1980s, the top tier was cut to 50% and then to 28% with tax-reform acts. (That is, until the resulting deficit caused Congress to rethink and raise it to 39.8% in the 1990s.) It has since occupied a narrow range between 35% and 40.8%.
No one loves paying taxes. But historically, today's tax rates are low. Here's a look at historical tax brackets in the US:
The number of brackets has not remained constant either. (In 1919, there were over 50.)
And while some of these rates seem very high (some years up to 94%), they only applied to income that exceeded very high amounts for their times.
In addition, the tax code has morphed over the years to provide varying amounts of shelter for even very high incomes. The tax code is an imperfect reflection of the politics and priorities of government over the years. And it's up to us to navigate it to our advantage and pay our legal obligation - but not a cent more.