Determining which federal income tax bracket your earnings fall into is surprisingly complex. But performing this calculation can be instrumental in helping you find strategies to reduce your federal tax bill and double-check any calculations done by a tax software program or tax preparer.
Taxpayers should know that the Tax Cuts and Jobs Act generally reduced tax rates. But they should also note that the increased standard deduction and loss of personal exemptions, among other factors, will impact the calculations used to determine the tax bracket into which their income falls.
Explore the 2019 Income Tax Brackets
Below are the tax rates for the 2020 filing season for three common filing statuses. Dollar amounts represent taxable income earned in 2019:
How Tax Brackets Work
In general, there are seven tax brackets for ordinary income -- 10%, 12%, 22%, 24%, 32%, 35% and 37% -- with the bracket determined by filers' taxable income. The federal government uses a progressive tax system, which means that filers with higher incomes pay higher tax rates. It's also graduated in such a way so that taxpayers don't pay the same rate on every dollar earned, but instead pay higher rates on each dollar that exceeds a certain threshold.
To determine your federal income tax rate, you'll need to know your filing status, income and the difference between your marginal and effective tax rate.
Read on for additional information about each of these tax-filing processes -- and how to use them to reduce your bill or increase your tax refund this year.
[See: 9 Red Flags That Could Trigger a Tax Audit.]
Identify Your Filing Status
Before you know which tax bracket your income falls into, you have to know your tax-filing status. Common statuses include:
-- Married filing jointly.
-- Married filing separately.
-- Head of household.
The status you'll use will depend on whether you're single or married, have qualifying dependents and other aspects of your specific tax situation. Many married couples file taxes jointly, but some may choose to file separately to reduce their student loan payments or because they're in the process of divorcing.
How to Determine Your Taxable Income
Full disclosure: This is difficult to do by hand, but it can be a worthwhile exercise.
First, calculate earnings from your work, side hustles, rental properties and other sources, then subtract any income that is considered an exclusion by the tax code, such as proceeds from a life insurance policy. That calculation will yield your gross income.
"Gross income is pretty much everything, and it's defined in the law as income from all sources unless there's an exception in the tax code," says Chris Raulston, a Memphis, Tennessee-based wealth strategist at Raymond James.
Next, you'll subtract certain tax adjustments, such as student loan interest and contributions to an individual retirement account, or IRA, to figure out your adjusted gross income.
[See: 15 Tax Questions -- Answered.]
Feeling tired? You're not done yet.
After determining adjusted gross income, you'll need to subtract tax deductions. That involves deciding whether to take the standard deduction ($12,200 for single filers; $24,400 for married filing jointly) or itemize, which you do by manually subtracting below-the-line deductions, such as charitable contributions and mortgage interest.
Finally, you'll have reached your taxable income and can determine your tax bracket using this number. To complicate things, certain investment income is taxed at a capital gains rate and not at the ordinary income rate. So, keep that in mind as you do this exercise.
Understand the Marginal Tax Rate vs. Effective Tax Rate
Say you're a single filer who earned $50,000 in 2019 in taxable income. You'll use the table to determine that you fall into the 22% tax bracket, which is known as your "marginal rate." But that doesn't mean you pay 22% of every taxable dollar to Uncle Sam. "Just because your income may fall into the 22% or 24% tax bracket, it doesn't mean all your income is taxed at 22% or 24%," says Mark Jaeger, the Cedar Rapids, Iowa-based director of tax development at tax software company TaxAct.
Instead, you're paying 22% on any amount you earn above $39,475. So, your effective tax rate will actually look like this:
10% x $9,700 = $970
12% x $29,775 ($39,475 - $9,700) = $3,573
22% x $10,525 ($50,000 - $39,475) = $2,315.50
Your total tax liability will be the total of those amounts, or $6,858.50, which is a nearly 14% effective rate.
The 2018 Income Tax Brackets
If you're filing an amended tax return or are curious about how tax rates have changed year over year, here are the tax changes for the 2018 tax year (2019 filing season):
[Read: How to File Back Taxes.]
The 2017 Income Tax Rates
Here are the tax rates for the 2017 tax year (taxes filed by April 2018):
Consider Ways to Lower Your Tax Rate
To lower their tax bill, filers may want to use strategies to place themselves in a lower tax bracket, especially if their taxable income falls right on the cutoff line between brackets.
Before the end of the tax year is the best time to consider moves such as delaying income or making contributions to certain accounts, such as health savings accounts and retirement funds, experts say. Work with your tax preparer or financial advisor to identify additional ways to lower your tax bracket. A financial professional may suggest "bunching" deductions in 2019, for example, to qualify to make itemized deductions and lower your tax bill. Jaeger recommends considering making year-end charitable contributions if you're considering itemizing, which is more difficult to do under tax reform. You may also want to increase tax-deductible retirement contributions to an account such as a 401(k) or 403(b).
Bottom line: Knowing your tax bracket will help you better understand your tax bill and how to reduce it.