How to Calculate Federal Income Tax – Rates Table & Tax Brackets

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income tax bracketsThe United States income tax laws are based on a progressive tax system. Basically, this setup means that you pay a percentage of your income, owing more taxes when you make more money, and contributing fewer tax dollars when you make less money.

Theoretically, a progressive system distributes the tax burden more heavily onto those who make more money and thus have more ability to pay, and away from those who can’t afford as much.

Over time, tax deductions, credits, exemptions, and loopholes have modified and complicated our system. But at heart the American income tax system uses a relatively simple series of stepped tax rates to determine how much you owe.

How Much You’re Taxed

Your total tax owed is based on your adjusted gross income. When you fill out Form 1040 (or when your tax preparation software program fills it out for you), you’ll enter the appropriate totals for all of the income you earned from various categories such as wages, alimony, unemployment, or business profits. Then, you’ll take an assortment of deductions, such as for contributing to an IRA or paying student loan interest. Deductions mean that you’re reducing your taxable income, ultimately lowering the amount you pay in taxes. You’ll also deduct money from your income for your personal tax exemption as well as any dependents’ exemptions.

Once you add up all of your income and subtract your deductions and exemptions, you end up with your adjusted gross income – and that number is your taxable income. (Some types of income, such as qualified dividends, aren’t taxed at normal rates, but we’ll deal only with normally taxed income here.)

How Much You’ll Owe

After you figure out your taxable income, you can determine how much you owe by using the tax tables included in the Form 1040 instructions. Though it looks like a complicated table of calculations, it’s really a very straightforward approach. You just look up your income, choose your filing status (single vs. head of household, or married filing jointly vs. married filing separately), and then find your spot on the chart.

For simplicity’s sake, the tax tables list income in $50 chunks, making the math a lot easier once you round things off. The tables only go up to $99,950, so if your income is $100,000 or higher, you’ll use a separate worksheet to quickly calculate your tax.

For example, if your taxable income (line 43 on your Form 1040) is $41,049, then using the tax tables you can easily find that your tax would be:

  • $6,113 if you file as single
  • $5,246 if you’re married filing jointly or as a qualifying widow or widower
  • $6,113 if you’re married filing separately
  • $5,506 if you’re filing as head of household

What Are Tax Brackets?

Tax tables show the total amount of tax you owe, but how does the IRS come up with the numbers on those tables? Perhaps the most important thing to know about the progressive tax system is that not all money is taxed at the same rate.

The first dollar you earn in a year is taxed at a lower rate than the last dollar you earn. If you make $95,000 in a year and your neighbor makes $60,000, you’ll both start out paying the same rate, but you’ll end with a higher rate. When you pass certain thresholds, the percent of income that you owe in taxes goes up, but the rate on the money you already earned doesn’t change. This protects you, for example, from paying an inflated tax rate if you lose a high-paying job, take a pay cut, give up some shifts, or miss some commissions. You don’t owe more until you make more.

For instance, if you are filing as single, your adjusted gross income up to $9,075 is taxed at 10%. Then, every dollar between $9,076 and $36,900 is taxed at 15%. These groupings are called tax brackets. You don’t pay higher taxes just for having a higher projected salary; you pay higher taxes beginning on the day you start officially taking home the money in the next bracket.

Tax Brackets for Income Earned in 2014

Tax rate Single filers Married filing jointly or qualifying widow/widower Married filing separately Head of household
10% Up to $9,075 Up to $18,150 Up to $9,075 Up to $12,950
15% $9,076 – $36,900 $18,151 – $73,800 $9,076 – $36,900 $12,951 – $49,400
25% $36,901 – $89,350 $73,801 – $148,850 $36,901 – $74,425 $49,401 – $127,550
28% $89,351 – $186,350 $148,851 – $226,850 $74,426 – $113,425 $127,551 – $206,600
33% $186,351 – $405,100 $226,851 – $405,100 $113,426 – $202,550 $206,601 – $405,100
35% $405,101 – $406,750 $405,101 – $457,600 $202,551 – $228,800 $405,101 – $432,200
39.6% $406,751 or more $457,601 or more $228,801 or more $432,201 or more

Using these brackets, you can calculate the tax for a single person with an adjusted gross income of $41,049:

  • The first $9,075 is taxed at 10% = $907.50
  • The next $27,825 is taxed at 15% = $4,173.75
  • The last $4,149 is taxed at 25% = $1,037.25

Each bracket has a maximum, so the last dollars you earn are the only ones that really require any math from you. In this example, the total tax comes to $6,118.50.

But wait, didn’t the tax tables say the total tax would be $6,113? Yes. It’s a little quirk of the IRS that the tax tables usually tell you that your tax owed is a few dollars less than what actually calculating it out will tell you. Who knows why this is, but the good news is that what’s in the tax tables is what the IRS will legally determine that you owe, so you’ll save a few bucks. Consider it a margin of error in your favor.

Marginal Tax Brackets

The highest tax bracket that applies to you is called your marginal tax bracket. It’s the one bracket that you cross into but don’t make it out of by the end of the year. Since you don’t hit the maximum in this bracket, this is the percentage you’re going to keep your eye on. It’s the rate that you’ll be taxed for extra income at the end of the year.

Remember, the progressive tax system taxes your money based on when you earn it. If you get a raise late in the year, you’ll find that a bigger chunk goes to Uncle Sam. If you’re considering taking a second job for some extra cash during the holiday season, you’d end up paying the rate in your marginal tax bracket for this extra income at the end of the year. The tax isn’t going to ruin the extra cash in December, but don’t be surprised when you end up owing a little more in April.

Tax Credits

Tax credits are very valuable savings tools. While deductions merely reduce the amount of income for which you’re taxed, tax credits will reduce the actual amount of tax that you owe, dollar for dollar. For more information, learn more about the differences between a tax credit vs. a tax deduction.

You won’t start figuring out your tax credits until you know the total amount of taxes you owe. After you’ve deducted any taxes that you “pre-paid” by having them withheld from your paycheck (using tax form W-4) or by sending in estimated tax payments, you’ll start applying credits. Some credits, known as refundable credits, can reduce your tax liability to below zero, so you’ll get money back from the government above and beyond your tax liability. On the other hand, non-refundable credits can only bring your taxes owed down to zero. Even if the total amount of your non-refundable credits is greater than the number you found on the tax table, you can only get down to a $0 sum. The government won’t owe you money from non-refundable credits.

Final Word

Most people watch chunks of each paycheck disappear toward tax liability throughout the year. Sometimes the number changes, but it’s as if no one knows why. Then, before April of the following year, everyone waits for an accountant or tax prep program to announce a final total for a refund or taxes owed.

You can take the mystery out of your tax rate, without the complex mathematics that many people expect the IRS to use. Now that you know how to navigate the tax tables, you can get through the fog of figuring out your tax rate. You’ll make smarter decisions at the end of the year that will help make tax season a little easier and ease the burden on your wallet when it comes time to settle up with the IRS.

Do you know your marginal tax bracket? Based on this information, what money moves did you make (or expect to make) at the end of the year?

  • Boo

    what about overtime?

    • Kira Botkin

      Overtime pay is subject to the same income tax calculations as all of your other pay.

  • Attorney

    Thank you for sharing this. I’ve been looking for this. I’m very confuse, but now its clear.

  • BigBunny

    Kira, thank you for a well written article, as someone out there looking for work and trying to figure out my take home this was a big help to me!

    Thank you for all the extra’s you do as well, keep going!

    All the Best,
    Melissa & Zeus & 3 Rescue Cats! lol