The federal income tax is "progressive," meaning that your tax rate increases with your ability to pay. The higher your taxable income, the higher the rate charged on the "last dollar" of that income. The 15 percent marginal tax bracket is one of the lowest brackets; in fact, prior to 2002, it was the lowest bracket of all.
As of the 2010 tax year, people who filed their taxes as "single" or "married filing separately" were in the 15 percent marginal tax bracket if they had taxable income between $8,375 and $34,000. Married couples filing jointly were in the 15 percent bracket if they had taxable income between $16,750 and $68,000. For those filing as "head of household," the range was $11,950 to $45,550.
Your bracket is determined by your taxable income, not by your adjusted gross income, a higher number that serves as the basis for many other calculations in the tax code. Taxable income is the amount left over after you subtract all deductions and exemptions from your total income. For example, if you are a single taxpayer with total income of $45,000 in 2010, you would be put in the 25 percent bracket; but if you had $12,000 in deductions and exemptions, that would drop your taxable income to $33,000, putting you in the 15 percent bracket.
Being in the 15 percent tax bracket does not mean that you must pay 15 percent of all your taxable income. U.S. tax brackets are "marginal," meaning that the rate for your bracket is the rate charged on the "last dollar" of income. In 2010, for example, every dollar of a single filer's taxable income up to $8,375 was taxed at 10 percent. Every dollar above that amount was then taxed at 15 percent, up to $34,000. Every dollar over $34,000 was taxed at 25 percent, and so on up through the brackets. The difference is significant. If you were a single person with a $33,000 taxable income in 2010, you had a tax liability of $4,531.25 under the marginal bracket system. If you had to pay 15 percent on your entire taxable income, your tax bill would have been $4,950.
Marginal tax rates prevent you from losing money when an increase in your income moves you into a higher tax bracket. If your taxable income as a single person were to rise from $33,000 to $35,000, that would move you from the 15 percent bracket to the 25 percent bracket. If the bracket rate were charged on all taxable income, your after-tax income would go from $28,050 to $26,250 -- in other words, your raise would have cost you money. But under the marginal system, your after-tax income actually rises, from 28,468.75 to $30,068.75.
The income ranges for federal tax brackets -- and the rates in the brackets themselves -- are subject to change from year to year, either because of inflation or because Congress has made changes to the tax code. Always check with the IRS for the current rate schedule. It's published with the tax tables in the instructions for federal tax returns.
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