Tax Brackets and Federal Income Tax Rates: What You Need to Know

Most questions related to taxes don’t have simple answers, making it easy to become overwhelmed. This is especially true for the topic of federal income tax brackets. Regardless of your current income level, knowing your exact federal tax bracket is crucial. Since tax rates and brackets can change, staying informed should be a priority.

In this article, you will learn about the current income tax brackets, how to calculate the exact tax you need to pay, and tips on reducing your taxable income.

Federal Income Tax: The Basics You Should Know

What are the tax brackets? Tax brackets are used for determining your exact tax rate according to the volume of your income. It should be noted that we refer not only to your wage but to the totality of income sources after tax deductions.

The way it works is that the higher your income, the higher your tax rate increases. The entire system is built so that high earners have to pay more than individuals who earn lower incomes.

The IRS provides information on the relevant brackets and rates every year. It’s important to note that tax rates are always adjusted for inflation. For example, in 2023 and 2024, the IRS increased their rates by approximately 5.4% compared to the previous year.

What Are the Current Federal Income Tax Brackets?

“So, what is my tax rate?” you may wonder. Your federal income tax rate is determined based on your taxable income and also your filing status. There are five categories of statuses that you can file: Single, Married Filing Separately, Married Filing Jointly, Qualified Surviving Spouse, or Head of Household. Based on your filing status and taxable income, you can see what your maximum rate is.

The majority of income is taxed using these brackets, except for some dividends and specific capital gains.

Here are the tax brackets for 2024 (due in April 2025)

Determining Your IRS Tax Brackets: Steps to Take

All you have to do to determine your tax category is:

• Calculate your exact taxable income and determine your filing status;
• Find relevant brackets according to your tax year;
• Your bracket will correspond to your income’s highest bracket;
• Calculate your tax for the income according to each bracket using the right rate;
• Add up all the sums for each bracket to get your final federal income tax.

It is crucial that you apply correct compulsory financial charge rates, as any mistakes can lead to accuracy-related penalties.

To help you understand the calculation process, let’s use tax brackets for married filing jointly as an example. Let’s say you and your spouse have $150,000 in taxable income, which means that the maximum rate is 22%. However, a part of your income will be calculated using the 10% and 12% brackets.

This is how it works:

• The first sum of $23,200 is calculated at 10%—$2,320;
• The next $71,100 ($94,300 minus $23,200) at 12%—$8,532;
• And finally, the remaining $55,700 ($150,000 minus $94,300) at 22%—$12,254.

Calculating married filing jointly tax brackets shows that they need to pay the total sum of $2,320 + $8,532 + $12,254, which is $23,106 in taxes.

Tax Credits and Deductions to Be Aware Of

One way that people often use to lower tax rates is deductions. These expenses are subtracted from taxable income, so the sum to pay becomes lower. Examples of deductions include mortgage interest, charitable donations, theft losses, and more.

The main two types of deductions are standard and itemized. The standard one reduces your income by a specific fixed amount. Itemized deductions are determined based on a list of eligible expenses. If you want to deduct a certain sum from your income, you need to choose either standard or itemized deductions based on which one is more favorable. Both of these types of deductions cannot be applied at the same time.

Another way you can use to lower your tax rate is with the help of tax credits. The options include child tax credit, American opportunity tax credit, and earned income tax credit.

Effective Strategies to Reduce Taxable Income

In addition to various deductions and tax credits, you can use other strategies if you want to enter a lower bracket. Here are some steps you may want to take.

Make sure you have retirement savings

The role of retirement savings in reducing your taxable income cannot be underestimated. If you make contributions to specific retirement accounts, such as 401(k) plan or IRA, your income subject to taxes will be reduced by the amount you contribute to savings.

Get rid of losing investments

If you have losing investments, you should think about selling them to compensate for capital gains from other investments you have. As a result, you will get a reduction in taxable income.

Consider delaying income

If you know that your taxes for the ongoing year will be high, you may want to delay some income if you have such an opportunity. This may not be an option for everyone, but it is still a strategy to keep in mind.

Go for more efficient investments

If your current investments are not efficient, you may want to choose other options. The best strategy is to talk to a specialist to figure out the best investment option for you. One of the solutions is to go for municipal bonds, as they are not subject to federal income tax.

Final Thought

Now that you have a basic understanding of income tax brackets, you can determine how much money you owe using the provided table. You should keep in mind that tax rates are adjusted for inflation, so you should always look up up-to-date information. The details can always be found on the official page of the IRS.

One of the best solutions for reducing taxable income is having an advantaged retirement account. You should also not forget about standard and itemized deductions, as they can significantly lower the sum you need to pay.