Income taxes are not simple. Discussions about income taxes normally include not only terms like tax rate and tax bracket, but also terms such as adjusted gross income and taxable income.
Let’s start with some basics on how our tax system works.
First, you add up all your income. For most people, this includes wages, interest, investment income, and a few other things. That total is called adjusted gross income.
You then subtract your itemized deductions (mostly mortgage interest, state and local taxes, and charitable contributions). If you do not have a lot of those items, you use what is called the standard deduction. You also subtract an amount for personal exemptions. What you are left with is your taxable income.
Your taxable income is then taxed at different rates. Think of our tax system like stair steps. Each step represents a tax bracket of income that is taxed at a certain rate. The higher you go, the higher the tax rate on the income in that bracket. “Segments” of income at lower levels are taxed at lower rates and “segments” of income at higher levels are taxed at higher rates.
Here are the “brackets” and rates for 2019 tax returns.
Income Tax Rate Schedules for 2019
|2019 Single Return Rate Schedule||2019 Married Filing Jointly Rate Schedule|
|Taxable income levels||Tax rate||Taxable income levels||Tax rate|
|0 to $9,699||10%||0 to $19,399||10%|
|$9,700 to $39,474||12%||$19,400 to $78,949||12%|
|$39,475 to $84,199||22%||$78,950 to $168,399||22%|
|$84,200 to $160,724||24%||$168,400 to $321,449||24%|
|$160,725 to $204,099||32%||$321,450 to $408,199||32%|
|$204,100 to $510,299||35%||$408,200 to $612,349||35%|
|Over $510,300||37%||Over $612,350||37%|
Another way to think of the term tax bracket is to consider it to be the rate of tax you pay on your last dollar of taxable income. If you are in the 24% tax bracket, you last dollar of taxable income was taxed at 24%.
Let’s assume you are married, filing a joint return, and had a taxable income of $110,000 for 2019. The first $19,050 of income is taxed at 10%. The next $59,900 ($78,950 minus $19,050) was taxed at 12%. The last $31,050 ($110,000 minus $19,050 and $59,900) was taxed at 24%.
Therefore your total tax rate will be less than 24%, even though you are in that tax bracket.
As mentioned earlier, income taxes are not simple and everyone’s tax situation is different. These were simplified and if you want to learn more, talk further with your accountant to get a better understanding of the tax rules that apply to you.