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What is a Tax Bracket?

A W-9 form, a type of US tax form.
A W-2 wage and tax statement.
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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 20 November 2014
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A tax bracket is a cut off point or division, used in taxation systems that progress or regress depending upon income. For instance in the US, the tax brackets are divided in the first few amounts into $10,000 US Dollar (USD) increments. Note these brackets don’t include other types of taxes like social security payments or disability insurance. Instead the dollar amounts of your income are taxed by bracket, and you often pay different percentages depending upon what income you make.

A simple understanding of the US tax bracket is to imagine that someone making $1-10,000 USD is taxed 10% of their income (this is a slight simplification). Income above the first $10,000 USD would be taxed at a higher percentage. It’s also important to understand that there are allowable deductions for each person. The single person making $10,000 USD wouldn’t pay $1000 USD in taxes. Instead, he would have a standard deduction of $5,350 USD and a personal exemption of $3,400 USD (with amounts subject to change). He would not be paying taxes on any amount but that money made in excess of his deductions.

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With our single person example, this would mean that the person would pay no taxes if he made less than $8750 USD. The 10% rate would apply to amounts between $8751 USD and $18,750 USD. Amounts made over this would be taxed at a higher percentage, but the first tax bracket would only be taxed at 10%, and no money under the sum of standard deductions and personal exemptions could be considered as taxable income.

Essentially, the tax bracket determines the graduating percentages for which you will be taxed, and these percentages may vary from country to country. Any change to tax law can raise or lower percentages or change the amount of exemptions or deductions. The tax bracket also refers to where your income falls. If you make more money, you may have jumped into a higher bracket, and if you make less you may be in a lower bracket.

Not only does the amount earned, but the dependents you have, and whether you’re married can change tax bracket status. Our individual example, if he had a spouse making no income could make up to $17,500 USD in non-taxable income. Both he and his spouse would each be entitled to a personal deduction and an exemption. They would not pay taxes on this first amount and the 10% tax would then apply to the next $10,000 USD they made over that.

Taxable income is different than income, which is why it’s important to make sure you account for all your deductions and exemptions before you search for your tax amount when you file your taxes. What tax bracket you’re in largely depends not on your total gross pay, but on your taxable earnings after deductions are taken. Any progressive system is further complicated because you can’t simply figure out taxes by percentage, flat tax, since you don’t pay the same percentage on all the money you earn. Since tax percentages rise, you’re paying different percentages on each bracket you reach and then exceed.

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