Tax bracket

Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, though that is rarer). Essentially, tax brackets are the cutoff values for taxable income—income past a certain point is taxed at a higher rate.

Example

Suppose that there are three tax brackets: 10%, 20%, and 30%. The 10% rate applies to income from $1 to $10,000; the 20% rate applies to income from $10,001 to $20,000; and the 30% rate applies to all income above $20,000.

Under this system, someone earning $10,000 is taxed at 10%, paying a total of $1,000. Someone earning $5,000 pays $500, and so on.

Meanwhile, someone who earns $25,000 faces a more complicated calculation. The rate on the first $10,000 is 10%, from $10,001 to $20,000 is 20%, and above that is 30%. Thus, they pay $1,000 for the first $10,000 of income (10%), $2,000 for the second $10,000 of income (20%), and $1,500 for the last $5,000 of income (30%), In total, they pay $4,500, or an 18% average tax rate.

In practice the computation is simplified by using point–slope form or slope–intercept form of the linear equation for the tax on a specific bracket, either as tax on the bottom amount of the bracket plus the tax on the marginal amount within the bracket:

$

3

000

+

(

$

25

000

−

$

20

000

)

×

30

%

=

$

3

000

+

$

1

500

=

$

4

500

,

{\displaystyle \$3\,000+(\$25\,000-\$20\,000)\times 30\%=\$3\,000+\$1\,500=\$4\,500,}

or the tax on the entire amount (at the marginal rate), minus the amount that this overstates tax on the bottom end of the bracket.