search Nothing found
Main Dictionary T

Tax Brackets

Tax Brackets — are the ranges of income taxable under a certain rate. Tax brackets are created for progressive taxation where the sum of tax depends on the revenue of the individual. They may change from year to year. Currently, in the USA there are several tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. To define the tax bracket, the individual should compute their taxable income and subtract the adjustments and deductions from this sum. If the person has more than one source of income they are calculated together, not separately.  

What Are Tax Brackets

Tax brackets were developed by the state revenue service to define how much money the individual should pay. This sum depends on the revenue. To define such an amount the taxpayer should find a tax bracket that is congruent with their level of income. 

Also, the tax bracket is defined according to the filing status which is close to the marriage status. This status is essential because it shows the occupation of a person or the number of financially dependent persons. If the person provides another family member (spouse, child, parent) their taxes will be reduced.

Currently, there are the following filing statuses for taxation:

  • Single flier. This status is assigned to unmarried persons that don’t have another status. Also, this status can be assigned to divorced persons or separated for half a year, a separate maintenance decree.
  • Married filing separately. This status is assigned to married individuals who decided to record their income on a separate tax return. Usually, this status is used when one of the spouses has significant financial expenses. 
  • Married filing jointly. This status is assigned to married persons who chose to record their income in one tax return. This status is used when one of the spouses earns much more than another to support the spouse with a lower income.  
  • Qualifying widow(er). This status is assigned to widowed persons with dependent kids for two years. This allows them to file taxes jointly with the dead spouse.    
  • Head of household (HOH). This status is assigned to unmarried individuals that pay half of their income to support the house or a dependent person. It can be a child or a parent.

Another important thing that the taxpayer should understand is the difference between the tax rates and tax brackets. The tax rate is the number of deductions of an individual or business entity, which is calculated per unit of the taxable base. The tax rate is the basis of the tax system of the state. With its help, the authorized bodies calculate the amounts of tax deductions for a specific period. The amount of the rate is established by the legislative acts of the state. 

A tax bracket is an amount of income with a defined amount (marginal tax rate). It doesn’t always show the amount of money they pay. This amount is called the effective tax rate.

Are Tax Brackets Necessary 

The tax brackets exist within progressive taxation. This system is the opposite of the flat tax system. There are numerous discussions on which system is better and whether the tax brackets are necessary.

With the progressive tax system, the amount of money to pay depends on the person's income. More person gains, the more taxes they pay. This system is used to let people with low income save money to support themselves. Many individuals consider the progressive taxation to be fairer.

The progressive tax system is derived from the compensatory theory of progression. The compensatory theory implies that taxes on the rich should compensate for the difference in privileges the rich receive from the state. For example, taxes collected by the state can be divided into two groups according to the degree of burden on classes: taxes on the disadvantaged and taxes on the wealthy ones. The difference arises from the fact that the share of income spent on consumption is much larger for the poor and the middle class than for the rich.

However, others suppose that the flat tax system is better. The high taxes force the riches to look for tax loopholes and hide the money in offshore zones. Also, the absence of a fixed tax rate determines the progressive system of subjective taxation, depending on the opinion of the tax authority. This furthers the development of the shadow economy. The shadow economy is the economic relations between citizens of a society that develop spontaneously, bypassing existing state laws and social rules. The income of this business is hidden and not taxable. Any business that results in the concealment of income from government agencies or tax evasion can be considered a shadow economic activity.

Currently, most people consider the progressive tax system better because it allows the government to collect taxes and provide social stability. The low-income citizens can save money for their families and escape the poverty trap. Indirect taxes can also be progressive if they provide exemptions or low rates for goods that are actively consumed by the economically disadvantaged.

Subscribe to our newsletter and stay up to date with all the news!