How Do Tax Brackets Work?

Your tax bracket partially determines how much of your income goes to Uncle Sam each year. The U.S. uses a multi-tiered system — the more income you earn, the higher your tax rate. There are seven tax brackets. Each one contains an income range and a corresponding tax rate ranging from 10% to 37%. Does that mean all your income is taxed at your tax rate? Nope. The IRS cuts taxpayers a break here. It can be confusing, but here’s a simple breakdown of how it works. Understanding your tax bracket can help you avoid unwanted surprises come tax season.

What are the tax brackets for 2022?

Ask and you shall receive. Tax brackets for 2022 shake out as follows:

 
 
 
 
 
 
 
 

You’ll see that no matter which tax bracket you fall in, not all your income will be taxed at the corresponding rate. For example, let’s say you’re a single filer who earns between $89,076 and $170,050 in 2022. Your tax bracket is 24%, but that doesn’t mean the federal government will take a 24% cut of your total income. Instead, you’ll pay a set dollar amount of $15,213.50 — plus 24% on earnings above $89,075.

How are tax rates determined?

On top of your earned income, your tax-filing status also affects your tax bracket. You can file your taxes in one of four ways:

  • Single

  • Married, filing jointly

  • Married, filing separately

  • Head of household

The head of household status is usually more generous when it comes to tax brackets. If you qualify, you’ll likely have a lower tax rate and a higher standard deduction. The latter is a flat dollar amount that reduces your taxable income. You can either take the standard deduction or itemize your deductions if you think the total will work out higher that way.

 
 

To file as head of household, you must have a qualifying child or dependent. The following also has to apply:

  • You were unmarried on the last day of the tax year

  • You pay for more than half of the household expenses

What counts as earned income?

Earned income is exactly what it sounds like. Paychecks from an employer obviously count, but so does money you bring in from a side gig, freelancing, or running your own business. Regular employees typically have federal (and possibly state and local) taxes deducted from their paychecks. Self-employed workers, on the other hand, have to pay estimated quarterly taxes every few months. 

Calculating your tax obligation can be tricky. That’s why Brooklyn FI offers tons of resources for folks who are making the jump from employee to consultant or business owner. In the meantime, this handy calculator can help you make a realistic guess.

Tax bracket changes for 2023

Now that you’ve got a handle on how tax brackets work, be aware that they’re changing for the 2023 tax year. The IRS is making tax inflation adjustments that include wider tax brackets and higher standard deductions. That could bring down your financial liability when you file your tax return in April 2024. We’re here to help you make sense of your tax rate if you have questions along the way.

AJ Grossan