Your Tax Bracket

Finding your tax bracket, and understanding it

By Kaye A. Thomas
Updated January 21, 2008

Knowing your tax bracket, and understanding its significance, can help with your tax planning.

Click here for the 2008 tax rate schedules, or here for 2007 rate schedules. For an explanation of tax brackets, read on.

Your tax bracket is used to estimate the amount of additional tax you'll pay if your income increases — or the amount you'll save if you can claim a deduction. If you're in the 25% tax bracket you can expect to pay about $250 additional tax if you have $1,000 additional taxable income. In the 15% tax bracket, a $200 deduction will save you about $30.

Knowing your tax bracket can help you make better investment decisions. For example, you may have a choice between a deductible contribution to a traditional IRA or a nondeductible contribution to a Roth IRA. Your tax bracket determines the value of that deduction.

Where tax brackets come from

Congress establishes tax rates that apply to different levels of taxable income. Current law provides rates from 10% to 35%. The higher your income, the higher your tax rate.

The range of income where you stay at any particular rate is known as a tax bracket. For a single person in 2008 the rate on taxable income between $32,550 and $78,850 is 25%, so those numbers establish the 25% bracket. If you're single and your taxable income is between those two numbers, your tax bracket is 25%.

Common mistakes

There are several points of confusion that often come up in connection with tax brackets.

Tax brackets and earnings: Some people have in mind the general notion that their tax bracket depends on how much they earn. That's roughly true. But it doesn't mean you can hold onto the same tax bracket as long as your earned income stays the same. Your tax bracket depends on your taxable income, regardless of the source of that income. For example, you can move into a higher tax bracket because of increased investment income or a distribution from a pension plan — or even because of a decrease in your deductions.
Sudden change in tax: Another misconception is the notion that your tax will suddenly increase by a huge amount when you move into a higher tax bracket. For example, if your taxable income is in the 15% bracket, but just a few dollars below the 25% bracket, you might be concerned that earning a few dollars more will cause you to pay a lot more in tax. Relax. The first $100 dollars you earn in the 25% bracket will cause your tax to increase by $25. You still pay only 15% on all the money you earned below the 25% bracket.
Tax brackets and withholding: Don't confuse tax brackets and withholding rates. The relationship between your tax bracket and the amount of tax your employer withholds is indirect. Withholding rates are based on averages, not specific tax brackets. For example, your withholding rate may be about 20%, even though there's no tax bracket between 15% and 25%.
Borders between tax brackets: Your taxable income may happen to fall very close to the border between two tax brackets. If it does, you can make a mistake when you use your tax bracket to estimate your tax consequences.

Example: You're single and your 2008 taxable income is $32,500. That puts you in the 15% tax bracket. But if you have an additional $1,000 of taxable income you'll pay almost $250 more in taxes. The reason is that even though you're in the 15% bracket, you're very close to the 25% bracket.

Tax brackets and marginal rates: In some cases the added tax you pay when your income goes up isn't the same as your tax bracket. That's because the added income can cause you to lose some other tax benefit. For example, added income can mean smaller itemized deductions or a reduction in the amount you claim for your exemptions. You may find that $1,000 of added income causes your tax to go up by $292 even though you're in the 28% bracket. Your tax bracket is just an approximation of the added tax. To be more precise, we would say you have an effective marginal rate of 29.2%. In most cases, the tax bracket is close enough to the effective marginal rate for purposes of making investment decisions.

Finding your tax bracket

Finding your tax bracket involves two steps. First, determine your taxable income for the relevant year. Then look that number up in the relevant tax rate schedule.

Tip: If you use tax software to prepare your returns, check to see if it will generate a report that includes information about your tax bracket.

Taxable Income

You can find your taxable income for a previous year by looking at your tax return. It's clearly labeled — but not very conspicuous. Just look for the words "taxable income."

If you need to estimate your taxable income for a year in the future, the best way to start is to know your taxable income for the most recent year. Then make adjustments for changes you might anticipate: increases or decreases in income or deductions, and perhaps a change in filing status.

Tax Rate Schedules

Once you know your taxable income, you need to look it up in the appropriate tax rate schedule. This is not the same as the tax tables you use to look up your tax! Those tables give you dollar amounts but not tax rates. What you want is a schedule that tells you the tax rate as a percentage for your level of taxable income.

The IRS publishes tax rate schedules in the instructions for Form 1040, and also for 1040-ES (the form used to pay estimated tax) — but not in the instructions for Forms 1040A or 1040EZ. Current tax rate schedules for every filing status can be found in the Reference section of this web site.

Here's a sample tax rate schedule: the 2008 tax rate schedule for single filers.

Single
Taxable income is over	But not over	The tax is	Plus	Of the amount over
$0	8,025	$0.00	10%	$0
8,025	32,550	802.50	15%	8,025
32,550	78,850	4,481.25	25%	32,550
78,850	164,550	16,056.25	28%	78,850
164,550	357,700	40,052.25	33%	164,550
357,700		103,791.75	35%	357,700

If you're a single filer and your 2008 taxable income is $20,000, then you're in the 15% tax bracket. With $40,000 of taxable income you would be in the 25% tax bracket.