Tax bracket
Also called income tax bracket
A range of taxable income taxed at a particular rate; in the U.S. federal system, each slice of income is taxed at its own bracket’s rate.
What it means
The federal income tax is progressive: taxable income is divided into bands, and each band has its own rate. Only the income that falls inside a band is taxed at that band’s rate. Bracket thresholds differ by filing status and are adjusted for inflation each year.
A common myth is that a raise can push someone into a higher bracket and reduce their take-home pay. It cannot: moving into a higher bracket only taxes the dollars above the threshold at the higher rate. Many states have their own brackets, while some use a flat rate or have no income tax.
Example
Suppose a hypothetical system taxes the first $10,000 at 10% and everything above at 20%. On $50,000 of taxable income, tax is $1,000 plus 20% of $40,000 ($8,000), or $9,000. A $1,000 raise adds only $200 of tax.
How it’s used
- Estimating the tax on extra income
- Understanding a paycheck or tax return
- Timing income and deductions
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.