Income taxes are the primary source of revenue for the federal government. Since the passage of the 16th Amendment to the Constitution, the federal income tax system has been a progressive one based on taxable income. The amount of income that pushes you into a higher tax bracket depends on factors such as your filing status, exemptions and deductions.
Federal income tax brackets vary based on your filing status, which is determined primarily by your marital status as of the last day of the year. Married people who file separate returns have the highest marginal tax rates, and those who file joint returns have the broadest tax brackets. Tax brackets for single people and those filing as head of household fall between those ranges.
As of the 2012 tax year there were six income tax brackets ranging from 10 percent to 35 percent. The ranges for those brackets varied based on filing status. For example, the first $17,400 earned by a married couple filing a joint return was taxed at 10 percent, but only the first $8,700 earned by a single individual fell into the 10 percent bracket. Tax brackets are adjusted periodically based on the cost of living and on tax legislation. So the amount you can make before you move into the next higher tax bracket varies from year to year.
Graduated Tax Rates
The amount of your income that falls within a particular tax bracket is taxed at that rate. Any amount you earn that exceeds that tax bracket is taxed at the next higher rate, but the higher rate does not affect any amounts below that threshold. For example, if you earn $25,000 in 2012 and you file your taxes as a single person, the first $8,700 is taxed at 10 percent, incurring $870 in taxes. The remaining $16,300 ($25,000 minus $8,700) is taxed at 15 percent, or $2,445. Your total tax obligation is $3,315, for a marginal tax rate of 13.26 percent.
When it comes to income taxes, your tax bracket depends not on how much you make, but on how much of your income is subject to taxation. The IRS considers all income that is not specifically exempted from taxes to be taxable. You can reduce the amount of your taxable income by either itemizing your deductions or claiming the standard deduction. You might be able to claim an exemption for yourself, your spouse or your dependents. Certain adjustments to your income, such as moving expenses or contributions to a traditional individual retirement account, can also reduce your taxable income.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.