Tax Brackets

Your bracket is determined by how much taxable income you receive each year and your filing status. There are four filing statuses and seven graduated tax rates for 2021 taxes due on April 15, 2022.

Each of these filing statuses has its own tax brackets. The brackets are beginning and end points at which your income is taxed at a specific rate. Understanding how tax brackets work – and which bracket your income falls into – can be helpful in your overall personal finance strategy.

The terms tax rate and tax bracket are often used interchangeably, but they are different things.

The marginal tax rate is the tax rate you pay on an additional dollar of income. The federal income tax’s progressive nature causes the marginal tax rate to increase as your taxable income increases. These different percentage amounts – or tax rates – are broken into seven tax brackets.

A tax bracket is a certain block of your income. Each tax bracket has a different tax rate. Unless your income is in the lowest bracket, your income will fall into multiple tax brackets.

The federal income tax is a progressive system. People who make higher incomes are taxed at progressively higher rates.

The federal government divides your income into blocks of money. Each block is a tax bracket. Each bracket of income is taxed at a progressively higher rate.

Not all of your income is taxed at the highest rate for your income. Each block of income is taxed at the rate for that particular bracket.

Take a look at the 2021 tax brackets if you filed single with $60,000 in taxable income.

There are steps you can take to legally reduce your tax bill by getting into a lower tax bracket. These generally work best if you are on the edge of a higher tax bracket where slightly lowering your income could keep you from crossing that line.

You may be able to use multiple strategies, credits and deductions to significantly reduce your tax liability, keeping your taxable income within a lower tax bracket. Tax preparation software and professionals may also help you find additional tax breaks that can help reduce your tax bill.

Individual income taxes accounted for 38 percent of all state tax collections in 2018, according to the nonprofit Tax Foundation. But state income tax brackets – and state income tax laws – vary from state to state.

The eight states that collect no state income taxes obviously have no state tax brackets.

The tax rate differs among the nine states that collect a flat rate on income from salaries and wages. New Hampshire also has a flat rate for all interest and dividend income – the only income taxed by that state.

Of the 32 states and the District of Columbia that have graduated-rate income taxes, the number of tax brackets vary widely. Hawaii has 12 brackets, the most of any state.

The Federation of Tax Administrators provides links to the state tax agencies for all 50 states plus Puerto Rico and the District of Columbia. You can contact your state tax agency to find more information about your state’s income tax brackets and income tax rates.