Updated April 17, 2014
The United States imposes tax on income using progressive rates. That means that a person's tax liabilities gradually increases as income increases. There are currently seven tax brackets, ranging from ten percent to 39.6 percent. Previously, there were six tax brackets ranging from 10% to 35%. This six-bracket rate structure was scheduled to expire, along with other tax reforms signed into law under President G.W. Bush, at the end of the year 2010. The Tax Relief Act of 2010
(H.R. 4853), signed into law on December 17, 2010, retained these six tax brackets for the years 2011 and 2012. The American Taxpayer Relief Act of 2012
revised the tax rates beginning with the year 2013.
We speak of marginal tax brackets
to refer to the tax imposed on the next dollar earned. This is a useful concept for tax planning, as it enables people to analyze the tax impact of additional income or additional deductions. The marginal tax bracket is the highest tax rate imposed on your income.
These marginal tax rates are also called ordinary income tax rates. That's because these tax rates apply to most kinds of income, and are distinguished from the more favorable capital gains tax rate imposed on long-term gains and qualified dividends.
The Marginal Tax Brackets
There are seven marginal tax brackets:
These rates are imposed by Congress and found in section 1 of the Internal Revenue Code
. The income to which these rates apply adjusts every year. The IRS updates the official tax rates to take into account inflation.
The Hidden Zero Percent Tax Bracket
Everyone is entitled to a standard deduction
or itemized deductions
and one or more personal exemptions
. Together these constitute a zero percent tax bracket, in the sense that there's no tax imposed the income represented by these deductible expenses.
Progressive Structure of the Tax Rates
The ordinary income tax rates are called progressive
because the tax rate that applies progressively increases as a person's income increases. A person with $1 million in income, just to take an example, would have their income taxed at all the tax brackets. Progressive tax rates are distinguished from a flat tax (in which there's one tax rate that applies to all income) or regressive tax rates (in which tax rates decrease as income increases).
Average Tax Rates versus Marginal Tax Rates
Marginal tax rates only tell half the story when it comes to tax planning. Also important is a person's average tax rate. This rate is a person's total federal tax liability divided by his or her total income. Average tax rates indicate, on average, what the federal government taxes on a person's income. To take one example using 2009 tax rates, an unmarried person with $50,000 in taxable income subject entirely to ordinary tax rates might have a tax liability of about $8,688, putting this person in the 25% tax bracket but having only 17% average tax rate. To find your own average tax rate, take your total federal tax liability and divide by your total income.