Knowing what your tax rates are makes estimating your taxes much easier. Starting in 2018, the Tax Cuts and Jobs Act (TCJA), created seven tax brackets on which to base a taxpayer's income tax.
The United States tax system is based on two main principles. First, it is a progressive tax system, which increases tax liability in line with increasing income. Basically, the more you make, the more you will pay.
Secondly, our tax system is a marginal one. That means that the tax rate is only based on the last dollar. Your tax increases or decreases based on changes in the last dollar. For example in 2019, you are single and prepare your tax return You have taxable income of $165,000. Looking at the 2019 chart for single filers, $145,000 falls within the 24% bracket. This does not mean your entire $145,000 is taxed at 24%.
Your first $9,700 is taxed at 10% or $970. Only the amount between $9,701 and $39,475, or $29,775 is taxed at 12%, or $3,573. The next $44,725 ($84,200 less $39,475) is taxed at 22%, or $9,840. Everything above $84,201 up to the $145,000 ($60,800), is taxed at 24% or $14,592.
Adding $970 (10%), $3,573 (12%), $9,840 (22%), and $14,592 (24%) together, gives you a final income tax bill (before other taxes and credits) of $28,975. This $28,975 may be increased by other taxes such as self-employment and additional Medicare taxes, or reduced by credits like the Child Tax Credit or American Opportunity Credit.
For every dollar up or down from the taxable income of $145,000, the tax will go up or down respectively by 24 cents. By knowing these tables, which adjust slightly for inflation each year, you can be better prepared in planning your tax situation and budgeting for the result.