The US tax system has seven income tax brackets, which are adjusted annually based on inflation.
The higher your taxable income, the higher your tax bracket will be
However, it’s important to understand that tax rates are not applied to all taxable income. Instead, the US uses a marginal tax system where tax rates only apply to certain portions of income. For instance, if you are a single filer with a taxable income of $100,000 in 2023, you are in the 24% tax bracket, but this percentage is only applied to your income above $95,375.
The lower tax rates will still apply to the rest of your income. A common misconception is that your tax bracket is the percentage applied to all taxable income, but this is not how it works.
The tax bracket percentage is only applied to the portion of your income that falls within that bracket
If you move to a higher tax bracket, you will almost certainly pay more in federal income tax, but the exact impact on your wallet will depend on your individual circumstances. Moving from the 24% to the 32% tax bracket is a larger jump than moving from 22% to 24%, and the impact will depend on how much of your income falls into your new, higher tax bracket.
To calculate your federal income tax, you can use the tax bracket table for your filing status and taxable income. The tax brackets only apply to taxable income after all deductions, so keep this in mind when making calculations. Overall, understanding how the US tax system works can help you make informed decisions about your finances and plan for tax season.
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