Understanding Personal Finance: How Federal Income Tax Brackets Work

Taxes are almost as old as the history of civilized society. At its core taxes make government and large swaths of society function. It is also one of the most talked about things in politics as it affects every single person, especially the federal income tax.

Notorious for the first real slap of how much an impact taxes have in your life, I’ve seen countless people get their first paycheck only to realize a significant portion of their gross net income was funneled into something called “Federal Income Tax.” For something that affects every single working American, it’s shocking that almost half of Americans don’t fully understand how federal income tax works. Every single legal American paycheck you get will be affected by Federal Income Tax for the rest of your life, so let’s spend 10 minutes explaining how much you have to pay and the basics of how federal income tax is calculated.

A misunderstanding of Federal Income Taxes

One of the most frustrating things I hear is when someone tells me that they don’t want to earn more money because their tax bracket will be higher. I mean why would you want to pay 24% of your income to federal taxes when you’re currently only paying 22%. This is especially prevalent when a small raise or bonus puts you into a different tax bracket. Basically, many people think that they’ll end up taking home less money because of a raise right at the cusp of tax brackets.

MYTH: ENTERING A HIGHER INCOME TAX BRACKET DOES NOT MEAN YOU WILL HAVE LESS NET INCOME (AFTER TAX TAKE HOME PAY) THAN YOU DID BEFORE.

The United States income tax system is called a progressive tax system. People who earn more money pay a higher percentage of taxes. So a single person earning $1,000,000 will pay a higher percentage than a single person paying $40,000. Sounds good so far?

The confusing thing about the federal income tax system is that every time your tax bracket changes you will only pay that higher income tax % on the income that is above the threshold from your previous tax bracket. Which means that the first $40,000 that single person making $1,000,000 will be taxed the exact same federal income tax as the single person who only earns $40,000 if they are both filing using something called a standard deduction (ignore tax credits, itemized deductions, and other tax aspects for now).

So let’s break this down. The current federal income tax brackets are the following for single, head of households, and married people. I’ll also explain what a standard deduction is below. There are other terms in taxes like itemized deductions, tax credits, and so forth, but since we’re learning about the basics will stick with the standard deduction and general tax brackets for now.

Basic tax terms:

Single: You’re single. Not necessarily romantically, but under the eyes of the federal government you aren’t married nor do you have dependents like children or parents you take care of with your income.

Head of household: A person who files as the main earner in their household that is not married and has at least one dependent (parents can qualify as dependents if you are the main earner of the household and they make less than $4,050 in net income every year)

Married: You’re married under the eyes of the federal government and file jointly (If you file separately your tax brackets are the same as a single person).

Standard deduction: The amount of money that is FREE from federal income tax. This number changes for people who are filing with itemized deductions (most people don’t). This does not mean money that is completely tax-free. You will still pay Social Security and Medicare taxes on all of your income below the standard deduction amount.

Explaining the Standard Deduction

Standard deduction amounts for 2019:

Single	Head of Household	Married filing Jointly
$12,200	$18,350	$24,400

If you’re filing as a single person, you don’t pay federal income taxes on the first $12,200 you make using the standard deduction. If you’re head of household, it’s $18,350, and for married people filing jointly, it’s $24,400. The only reason you wouldn’t be using a standard deduction is if you would be federal income tax exempt on a larger amount of your income by using an itemized tax deduction. So at the very least, you will be federal income tax exempt for these amounts.

Note – If you are earning less than this and you see a federal income tax amount being deducted from your paycheck, the IRS will give you your money back as long as you file taxes.

Federal Income Tax Brackets

Cool, we good so far? Now let’s learn about tax brackets. Above these standard deduction amounts, you start paying federal income tax!

Here’s one more term:

Federal taxable income: This is the income you earn every year that can be federally taxed. Subtract your total income for the year with your standard or itemized deduction amount. Example: a single person making $40,000 will have federal taxable income of $27,800, as they have a $12,200 standard deduction.

(Total yearly income – Standard or Itemized deduction = Federal taxable income)

The federal income tax brackets for singles, head of households, and married couples for 2019

Singles:

Tax rate	Federal taxable income	Federal income tax owed
10%	$0 to $9,700	10% of your federal taxable income
12%	$9,701 to $39,475	12% of the amount above $9,700 plus $970
22%	$39,476 to $84,200	22% of the amount above $39,476 plus $4,543
24%	$84,201 to $160,725	24% of the amount above $84,201 plus $14,382
32%	$160,726 to $204,100	32% of the amount above $160,726 plus $32,749
35%	$204,101 to $510,300	35% of the amount above $204,101 plus $46,629
37%	$510,301 or more	37% of the amount above $510,301 plus $153,799

Head of households:

Tax rate	Federal taxable income	Federal income tax owed
10%	$0 to $13,850	10% of your federal taxable income
12%	$13,851 to $52,850	12% of the amount above $9,700 plus $1,385
22%	$52,851 to $84,200	22% of the amount above $39,476 plus $6,065
24%	$84,201 to $160,700	24% of the amount above $84,201 plus $12,962
32%	$160,701 to $204,100	32% of the amount above $160,726 plus $31,322
35%	$204,101 to $510,300	35% of the amount above $204,101 plus $45,210
37%	$510,301 or more	37% of the amount above $510,301 plus $152,380

Married filing jointly (If filing separately see singles bracket):

Tax rate	Federal taxable income	Federal income tax owed
10%	$0 to $19,400	10% of your federal taxable income
12%	$19,401 to $78,950	12% of the amount above $9,700 plus $1,940
22%	$78,951 to $168,400	22% of the amount above $39,476 plus $9,086
24%	$168,401 to $321,450	24% of the amount above $84,201 plus $28,765
32%	$321,451 to $408,200	32% of the amount above $160,726 plus $65,497
35%	$408,201 to $612,350	35% of the amount above $204,101 plus $93,257
37%	$612,351 or more	37% of the amount above $510,301 plus $164,709

Those are the tax brackets for 2019. As you can see, there are different tax brackets depending on how you are filing. The big takeaway for everyone should be that your current tax bracket does not mean that all your earnings will be taxed that amount. As stated above, only the amount of money about the threshold for that tax bracket will be taxed that amount. Now a common question out there is whether or not a married person should file jointly or separately under the singles tax bracket? It depends! There are scenarios where you can save on federal income taxes with either of the brackets depending on how the income is split up. Consult a professional accountant to check.

Examples of how tax brackets work

ust to hammer in how tax brackets work here are a few examples of how much people pay with federal income taxes.

#1 – Anny making $35,000 as a single filer with a standard deduction

Total yearly income	$35,000
Standard deduction	$12,200
Total federal taxable income	$22,800

Using our tax brackets above, Anny will pay:

Tax Rate	Federal taxable income	Anny’s federal tax owed
10%	$9,700	$970
12%	$13,100	$1,572
Totals	$22,800	$2,542

#2 – Amy and Evan making $200,000 as a married couple filing jointly with a standard deduction

Total yearly income	$200,000
Standard deduction	$24,400
Total federal taxable income	$175,600

Using our 2019 tax brackets above, Amy and Evan will pay:

Tax Rate	Federal taxable income	Amy and Evan’s federal tax owed
10%	$19,400	$1,940
12%	$59,550	$7,146
22%	$89,450	$19,679
24%	$7,200	$1,728
Totals	$175,600	$30,493

As you can see in both of these scenarios, the amount of money they pay in their current tax bracket is only the amount above the threshold. In fact, for Amy and Evan, only $7,200 of their taxable income is taxed with the 24% tax rate. For their income below the threshold, it’s taxed at the appropriate tax rates. So if the lowest tax rate changes, it will affect Amy and Evan even if it isn’t their current tax rate as their first $19,400 in taxable income will be taxed to whatever the changed tax rate is.

Call to action

As you can see from these examples, going up a tax bracket shouldn’t scare you! In fact, you should be happy that you’ll be earning more money. You can hear some scary things online about taxes and rates, but as long as you understand how they work you’ll be able to understand how changes will affect you. It’s good to know about your current tax bracket and all the tax brackets below. Your current tax bracket is the amount of money you’ll be taxed for the next dollar you earn, but if there are changes to brackets below you it will still affect your federal income tax! If you have any questions feel free to comment below or send me a message. What are you waiting for? Calculate how much federal income tax you’re paying! Let’s make it happen.