Need a hand decoding taxes?

To help simplify tax season, we’ll discuss federal income taxes, including what income tax brackets are, how they work, important income tax terms, and other key insights to understanding your tax bracket. Bear in mind that you may also need to pay state and local income taxes, which are not discussed in this article.

Understanding income tax brackets

Tax brackets are the different ranges of income-assigned certain tax rates. In the United States, we have seven different tax brackets, with tax rates ranging from 10% to 37%. Tax brackets differ based on the filer's status: single, married filing jointly, married filing separately, or head of household.

Read more: Tax 101: Understanding the basics

Exploring 2023 tax brackets

The table below shows the tax brackets for single filers, married filers, and heads of household in 2023:

Previewing 2024 tax brackets

Below are the tax brackets for 2024, due in April of 2025:

Understanding federal income tax rates

The federal income tax is a tax the federal government imposes on the income of US taxpayers. Taxes apply to all types of income, regardless of location, line of work, and more.

The first income tax in the United States dates back to the Civil War when the federal government imposed a tax to help fund the war. The government’s right to impose taxes was cemented in the 16th Amendment, passed by Congress in 1909 and ratified in 1913.¹

Today, federal income taxes pay for much of the important expenditures necessary to keep the government and the country running.

Most employed people have taxes withheld from paychecks by their employers. Additionally, taxpayers must file an income tax return for each tax year to report all their income to the government and ensure they’ve paid the correct amount in taxes.

Though the tax system in the United States is complicated, it’s important to understand how the tax brackets work, what tax bracket you’re in, and how your federal income tax bill is calculated.

Understanding federal income tax brackets

As we mentioned, tax brackets are the different income ranges that apply to the various income tax rates. The United States has a progressive tax system for income taxes, meaning that the higher your household income, the higher the percentage you’ll pay in income taxes.

Different portions of your income are taxed at different rates. If you file as a Single taxpayer, the first $11,000 of your taxable income in 2024 is taxed at the lowest rate, while the last dollars you earn are taxed at a higher rate.

Knowing your tax bracket is important for several reasons. It can help you estimate how much you might owe in taxes, as well as give you a better understanding of why you owe what you do when you file your income tax return in April.

Determining your tax bracket

You might be surprised that you don’t just fall into one tax bracket. Instead, different portions of your income fall into different brackets. The tax rate that corresponds to the highest tax bracket your income falls into is known as your marginal tax rate. Your marginal tax rate is the rate at which the last dollar you earn is taxed.

The IRS provides clear income ranges for each tax bracket so you can find which you’re in. Keep in mind that the income ranges are different for each filing status, so it’s important to identify which applies to you.

Finally, remember that the tax bracket you fall into is based on your taxable income, not your gross income.

Taxable income calculation

Your taxable income refers to the portion of your income that is actually subject to income taxes.

You’ll notice when you file your tax return that your taxable income and gross income aren’t the same. Instead, your taxable income is what’s left after you claim certain deductions and adjustments. Examples include the standard deduction, itemized deductions, the student loan interest deduction, and more.

Here’s general illustration of how to calculate your taxable income:

1. Add up all of your gross income.
2. Subtract adjustments — also known as “above-the-line” deductions — from your income. These deductions are available regardless of whether you itemize your deductions.
3. Choose between the standard deduction and itemizing your deductions.

Once you’ve subtracted all deductions and adjustments you’re eligible for, the number that’s left is your taxable income. Once you’ve found your taxable income, you can use it to determine your tax bracket and marginal tax rate.

Read more: How to reduce taxable income: Can the average American pay no taxes?

Determining your federal income tax

Once you’ve found your taxable income, you can calculate your federal income tax. But remember, your entire income isn’t taxed at the rate corresponding to your highest tax bracket. Instead, each portion of income is taxed at the rate that corresponds to the tax bracket it falls into.

Suppose you’re a single filer and have a taxable income of $100,000 in 2023. The first $11,000 of your income is taxed at 10%. The next $33,725 of your income is taxed at 12%. The next $50,650 of your income is taxed at 22%. And the final $4,625 of your income is taxed at 24%. Here’s how that works out for your 2023 taxes:

As you can see from the table above, the total income tax liability on $100,000 of taxable income is $17,400, which indicates an effective income tax rate of 17.4%.

But that number doesn’t necessarily represent how much you’ll actually pay in taxes. Tax credits also allow you to lower your income tax liability. And unlike tax deductions, tax credits are subtracted from your tax liability rather than your taxable income.  Tax credits you qualify for would be subtracted from your income tax of $17,400.

Income tax rate terms

The specifics of income taxes can be confusing, especially given the many terms, many of which can be easily confused. Let’s talk about some common income tax rate terms you may need to know:

• Income tax rates: Your income tax rate refers to the various percentages at which income taxes are applied. Most people pay multiple different income tax rates, each of which applies to a different portion of their income.
• Income tax brackets: Income tax brackets refer to the different ranges of income and the tax rates that apply. There are currently seven income tax brackets, each of which applies to a specific income amount.
• Marginal tax rate: Your marginal tax rate is the rate at which the last dollar of your income is taxed. It refers to the highest tax bracket you’re in. For example, if you earn $75,000 as a Single filer in 2023 or 2024, your marginal tax rate is 22%, but you don’t pay 22% on all of your income.
• Effective tax rate: Your effective tax rate is the total tax you pay expressed as a percentage of your total taxable income. Because most people pay multiple tax rates, their effective tax rate is usually somewhere between their highest and lowest rates.
• Average tax rate: An average tax rate is the same as an effective tax rate. According to the IRS, the average tax rate in 2020 was 13.63%.²
• Ordinary tax rates: There are many different types of taxes that Americans pay. Income tax rates are also known as ordinary tax rates because they only apply to ordinary income. Different rates are used for other types of taxes.

Understanding other types of tax rates

Income taxes are just one type of tax you’ll owe the IRS each year, but it’s not the only type. Two other tax rates many people must pay are capital gains and FICA taxes.

Capital gains and dividend tax rates

A capital gain is when you sell an item for more than your adjusted basis (usually the amount you paid for it). Capital gains can technically apply to any asset, but they most often apply when discussing investments like stocks and bonds.

There are two basic types of capital gains. Short-term capital gains refer to gains on assets you have owned for less than one year. Long-term capital gains refer to gains on assets you have owned for more than one year. These two types of capital gains have different tax treatments.

First, short-term capital gains are taxed as ordinary income, meaning tax rates range from 10% to 37%. Long-term capital gains have a more favorable tax rate. Gains are taxed at 0%, 15%, or 20%, depending on your income.

It’s worth noting that some items have a slightly higher capital gains tax. For example, net capital gains on certain collectibles are taxed at 28%.

If you earn qualified dividends from your investments, you’ll pay rates similar to long-term capital gains tax rates on those earnings. Those that aren’t qualified are taxed as ordinary income. If you aren’t sure if your dividends are qualified, you can revisit your 1099-DIV form, as ordinary and qualified dividends are listed separately.

Read more: Ways to avoid or minimize capital gains tax

FICA tax rates

Another type of tax most people pay each year is FICA — short for Federal Insurance Contributions Act — taxes. FICA taxes are made up of Social Security taxes and Medicare taxes. For employees, FICA taxes are taken out of each paycheck by your employer, which affects your take-home pay.³ 

Social Security taxes

Social Security taxes pay for the retirement and disability benefits the Social Security Administration provides. Workers pay 6.2% of their income in Social Security taxes, and their employers match it for a total tax rate of 12.4%.

Social Security taxes only apply to income up to $160,200, meaning the maximum a person would have to pay in 2023 is $9,932.40.

Medicare taxes

Medicare taxes pay for the country’s Medicare program, which provides health insurance to those ages 65 and older. In 2023, both employees and employers pay a tax rate of 1.45%, for a total tax rate of 2.90%. Unlike Social Security taxes, Medicare taxes don’t have a maximum taxable amount. Instead, you’ll pay Medicare taxes on all of your  earned income.

Taxpayers with self-employment income calculate and pay FICA and Medicare taxes  differently than those who are employed since there’s no employer to provide the matching contribution.  While the same thresholds apply, the rates paid by self-employed taxpayers are generally double the amounts employed taxpayers contribute.

Understanding bonus tax withholding rate

If you’ve ever received a bonus from your employer, you may remember your tax withholding looking a bit different. The IRS sets certain standards for how employers should withhold taxes for supplemental wages, including bonuses. Other income that’s subject to the supplemental wage withholding rules includes:

• Commissions
• Overtime pay
• Payments for accumulated sick leave
• Severance pay
• Awards and prizes
• Back pay
• Reported tips
• Retroactive pay increases
• Payments for nondeductible moving expenses

Bonus tax withholding rate explained

When you receive a bonus, it will be taxed using one of two methods: the percentage method or the aggregate method.

The percentage method

The percentage method is the simplest way for bonuses to be taxed. It is used when the employer pays the bonus separately from an employee’s regular wages.

Using the percentage method, supplemental wages are taxed at a flat withholding rate of 22%. For example, if you earn a bonus of $5,000 in 2023, and it’s paid separately from your normal wages, your employer will withhold the bonus tax rate of 22%, which comes to $1,100 for taxes.

The aggregate method

If your employer includes your bonus or other supplemental wages on your normal paycheck, it must use the aggregate method to determine your withholding. The aggregate method requires that an employer withhold income taxes as if the total amount you’re being paid is your normal salary.

For example, suppose you normally earn $7,500 per month. That totals $90,000 annually, putting you in the 22% marginal tax bracket in 2023. But during one month, you receive a $5,000 bonus from your employer, which is included in your monthly paycheck.

Your monthly income for that month is $12,500 rather than $7,500. When calculating the taxes on that payment, your employer must do so as if you earn $12,500 each month (meaning $150,000 per year). Your income would then be in the 24% tax bracket.

Bonus withholding for high earners

Tax withholding is treated differently for workers who earn more than $1 million in supplemental wages throughout a calendar year. In that case, all supplemental income is subject to a withholding rate of 37%, the highest marginal tax rate.

Handling excess bonus tax withholding

As with other income taxes, the amount your employer withholds in taxes for your bonus isn’t necessarily the amount you’ll owe. In fact, when all is said and done, bonuses and supplemental income are treated and taxed exactly like any other income, including when it comes to state income taxes and FICA taxes (Social Security and Medicare).

While the IRS requires a withholding rate of 22% on supplemental income, many workers aren’t in the 22% tax bracket. If your bonus is taxed at a higher rate than you actually owe, you’ll get the excess back as a part of your tax refund, just as you would excess taxes on any other part of your income.

However, it also works the other way. Perhaps your employer withholds the mandatory 22% on your bonus, but you’re actually in a higher tax bracket. In that case, you could end up owing additional taxes on your bonus money.