The US federal income tax system is a progressive tax system. This means that the higher your income gets, the more you’ll pay on some portion of that higher income. But that higher tax rate doesn’t apply equally to all of your income.

  • For instance, with your 2020 taxes, the first $12,400 of income that you earn (if you’re filing as a single person), won’t be taxed because of the standard deduction. Essentially the standard deduction removes that chunk of money from your taxable income.
  • The next $9,875 of your income will only be taxed at 10%.
  • Then if you make more, the money from between $9,876-$40,125 will be  taxed at 12%, and so on following the chart.

There is a common misconception that when you bump into a new “tax bracket” that all of your income is taxed at that higher rate. That isn’t actually true. Only those dollars of income within the higher “bracket'' are taxed at the higher rate.

2020 Federal Income Tax Bracket for Single Filers

Tax Rate Taxable Income Bracket Tax owed
10% $0 - $9,875 10% of taxable income
12% $9,876 - $40,125 $987.50 plus 12% of income over $9,875
22% $40,126 - $85,525 $4,617.50 plus 22% of income over $40,125
24% $85,526 - $163,300 $14,605.50 plus 24% of income over $85,525
32% $163,301 - $207,350 $33,271.50 plus 32% of income over $163,300
35% $207,351 - $518,400 $47,367.50 plus 35% of income over $207,350
37%

$518,401+

$156,235 plus 37% of income over $518,400

Here’s an example that lays it out (keep in mind that the numbers below are only a ballpark and don’t take any specifics into account that could change the total, so they may not apply in your circumstances):

  • Say you’re an unmarried person who earns all your money through a W2 job and you make $72,000 in 2020:
    • Right away, $12,400 will be removed from the taxable income because of the standard deduction, leaving $59,600 in income.
    • The first $9,875 of that will be taxed at 10%, adding $987.50 to your (hypothetical)  income tax bill.
    • The next $9,876-40,125 will be taxed at 12%, adding $3,630 to the running total.
    • Then, the final portion, or the income  between $40,126-59,600 will be taxed at 22%, adding $4,284.28 to the running total.
    • Adding up those totals ($987.50+$3630.00+$4284.28) Leaves us with $8,902 as the approximate total, prior to any other adjustments in the tax return, of which there could be many!

If you do the math, you’ll see that $8,902 is only about 15% of the total income ($72,000). That 15% is what’s called the effective tax rate, and it’s far below the 22% paid on that last chunk of income.

But for those of us who are self-employed, you’ve got to also keep self employment tax in mind. It comes in at around 15% paid on your profit for the year (income minus expenses), but again, as with all IRS topics, it’s not so simple as there are some additional deductions available for freelancers.

Don’t understand something you’ve read above or want to ask more questions? Ask your prepare to explain this concept in more detail during your appointment. We can also let you know your effective tax rate based on your unique situation. Create your account on BrassTaxes.com to book an appointment!