What are tax brackets?

Understanding federal tax brackets 

For each tax bracket, there is a tax rate. Basically, the tax rate is the percentage of your taxable income you pay in taxes. Currently, there are seven rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your filing status, combined  with your taxable income for the tax year will determine which federal tax bracket you fall into. The lower your income, the lower your tax rate will be.  

Federal tax rates for 2022 and 2023 are the same. However, the IRS updated the tax brackets significantly due to inflation, to help taxpayers adjust due to the increased cost of living.   

Using this chart, you can see that if you’re a single filer with taxable income no more than $10,275, you will be placed in the lowest bracket, and pay just 10% of your income in tax. If you’re married and filing jointly, with a taxable income of $20,550, you’ll also be placed in the lowest bracket at 10%. 

What determines the tax bracket you fall into? 

Your earned income, other types of income, and deductions determine your taxable income which, in turn, determines your tax bracket. Deductions are one of the best ways to reduce your taxable income, so you pay a lower tax rate. Your Tax Pro can help you with this if you have questions. Keep in mind, based on your income, you could pay more than one tax rate. 

What is the difference between a tax bracket and a tax rate?  

Not much. Your tax bracket directly corresponds to your tax rate, which is the percentage of your income you pay in taxes, so they are related. In other words, a tax bracket is a collection of tax rates for a range of taxable incomes. Basically, there are three components of a tax bracket:  your filing status, tax rates, and taxable income. 

What is the highest tax bracket?  

For the 2022 and 2023 tax years, there are seven federal income tax brackets. The highest of these brackets has a tax rate of 37%. Since tax brackets increase based on taxable income, the higher the taxable income determines the highest tax rate in your final tax bracket. 

Understanding state taxes  

In many states, you may also have to pay income taxes in the state you live and/or work in. The rate at which you are taxed, and the bracket(s) you fall into, depends on your taxable income and whether you live in the state or not, because each state has different tax laws. 

In general, states typically take one of three approaches when taxing residents. There are nine states that do not tax earned income. Second, some states have a flat tax, which means that all income is taxed at the same rate. Lastly, some states carry a progressive tax, which means that higher incomes are taxed at higher rates than lower incomes, like the federal taxes.  

The state tax brackets you fall into, if any at all, depend on your state’s tax laws. Not sure? See a Tax Pro. 

How to know what tax bracket you’re in 

To understand which federal tax bracket you’ll fall into, the IRS has provided charts or tables that provide the amount of taxes or the calculation to determine your taxes. These charts or tables are based on your filing status as well as your taxable income. 

How can I lower my tax bracket? 

One effective way to reduce your tax bracket is to make regular contributions into your employer-sponsored retirement account such as a traditional 401(k), or your own retirement account. Putting some of your take-home pay into a retirement plan can help lower your taxable income. 

Retirement contributions and the impact on tax brackets  

It’s true that making contributions to a traditional 401(k) savings plan, also known as a retirement plan, could help lower your tax bill, as well as set you up for a more comfortable future. But let’s take a deeper look at how investing in these plans could lead to reducing your taxable income.  

There are a few different tax-deferred retirement accounts. Tax-deferred means you pay federal income taxes on this savings plan only when you withdraw money from it, rather than pay taxes on the contributions and earnings upfront. The difference between them depends on whether you're self-employed or work for a company with more or less than 100 employees. With a tax-deferred 401(k) plan, you’re setting aside money from your pay before federal and state income taxes are withheld. Putting money from your gross earnings pay into a traditional 401(k) lowers your taxable income so that you pay less taxes now. 

Example  

Let’s say your salary is $35,000 and your tax bracket is 25%. Contributing 6% of your salary ($2,100) lowers your taxable income to $32,900.  

Not only are you saving for your retirement with these plans, but you’re saving on taxes today, too.   

For the best help with filing your return and getting your biggest possible refund, don’t tax alone. Talk to your local Tax Pro and get the best help with your filing or answers to your biggest tax questions. We’re here for you all year. 

About the Author

Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.

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