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How Income Tax Rates Work in the United States

Most of us pay our taxes each year without looking through the federal tax codes with a fine tooth comb. That task is generally left to experts in the tax field, but it is actually easier to understand some aspects of the tax system than you might think. If you take a look the way the system works, you will see that while there are plenty of misconceptions out there among taxpayers in the general population, you can easily interpret what you owe once you understand the basics. For tighter results and a larger refund it's best to turn to a true tax professional, however. Since each of us must pay income tax each year, depending upon what we earn we will have a certain amount of our income that is considered taxable. The tax system of the United States is called a progressive tax system because the income tax rates vary according to what a person makes. As your income level rises, you enter certain brackets that tax the income within that bracket at a certain rate with each higher bracket being taxed at a progressively higher rate. Right now, there are six income tax brackets which tax at percentages of 10%, 15%, 25%, 28%, 33% and finally, 35% for the very highest levels of income. This highest level is generally considered to be $370,000 or more of income earned in a single year. What confuses most people is the fact that while a person who makes millions of dollars will have the taxable portion of their income taxed at a rate of 35% after it exceeds $370,000 they will be taxed differently for each of the tax brackets before the top. This means that not all of their income is taxed at the highest rate possible. In the first bracket they are taxed 10% just like everyone else, then 15% for the next bracket and so on. Once you understand this you can see that while it is true you are taxed at higher rates once you earn more money, not all of that income is taxed at the top possible rate. By having this better understanding of the tax system, you can more easily understand how taxation works at as a result, strategize more efficiently when it comes to financial planning.