The IRS released 60 tax provisions for the 2023 tax year. One of the inflation adjustments were to raise the thresholds for federal tax brackets for income taxes. What does this mean and how does it effect you? We all have heared it before, the more you make the more they take. This is exactly what this tax provision applies to. Marginal tax rates are the additional taxes paid for every additional dollar earned as income. What does this mean? In other words, it is the percentage at which your last dollar of taxable income is taxed. As income rises, each additional bracket of income is taxed at a higher rate. The purpose of the marginal tax rate is to place a larger share of the burden on the shoulders of the wealthiest taxpayers while lightening the load for those with the lowest incomes. This method of taxation is known as progressive taxation. The purpose of progressive taxation is to tax individuals based on their earnings so low-to-moderate income earners can be taxed at a lower rate than higher-income earners. It also means that people with higher taxable incomes are subject to higher federal income tax rates and people with lower taxable incomes are subject to lower federal income tax rates. The marginal tax rate is important to know and understand for every tax payer. Significantly impacting low-to-moderate tax payers specifically as this provides these taxpayers with refundable credits that increase with income. For example: If you had $50,000 of taxable income, you'd pay 10% on that first $11,000 and 12% on the amount of income between $11,001 and $44,725 (see below chart for reference). Then you would pay 22% on the rest because some of your $50,000 of taxable income falls into the 22% tax bracket. The total amount of the tax bill would be about $6,300 which is 13% of your taxable income.
HOW TO CALCULATE YOUR TAXABLE INCOME
First, figure out your taxable income by determining your total gross income which is the sum of all your income sources before any deductions or adjustments. Next, make certain adjustments from gross income to arrive at adjusted gross income (AGI) such as student loan interest, alimony payments, etc. Subtract any exemptions or deductions such as personal exemptions, standard deductions or itemized deductions or tax credits. The remaining balance is your taxable income. Once you have calculated your taxable income, the marginal tax rates are applied to this amount. There are currently seven (7) marginal tax rates and the associated income ranges over which they apply and differ based on your filing status.
MARGINAL TAX RATE CHART AND INCOME LEVELS
IRS Tax Brackets for Tax Year 2023
The income thresholds for the 2023 tax brackets were adjusted up to 7% from 2022 due to the record-high inflation over the past several years. With this being said, some people might be in a lower tax bracket than they were previously.
Tax Rate | Single | Married filing jointly | Married filing separetly | Head of household |
10% | $0 to $11,000 | $0 to $22,000 | $0 to $11,000 | $0 to $15,700 |
12% | $11,001 to $44,725 | $22,001 to $89,450 | $11,001 to $44,725 | $15,701 to $59,850 |
22% | $44,726 to $95,375 | $89,451 to $190,750 | $44,726 to $95,375 | $59,851 to $95,350 |
24% | $95,376 to $182,100 | $190,751 to $364,200 | $95,376 to $182,100 | $95,351 to $182,100 |
32% | $182,101 to $231,250 | $364,201 to $462,500 | $182,101 to $231,250 | $182,101 to $231,250 |
35% | $231,251 to $578,125 | $462,501 to $693,750 | $231,251 to $346,875 | $231,251 to $578,100 |
37% | $578,126 or more | $693,751 or more | $346,876 or more | $578,101 or more |
It is important to know that these tax rates apply only to the income in a specific income range or bracket, not the entire taxable income. For example, if a married taxpayer has $750,000 of taxable income, only the amount above $693,750 - or $56,250- is subject to a marginal rate of 37%, not the entire $750,000. The beauty of tax brackets is that no matter which bracket you're in, you won't pay that tax rate on your entire income.
For more information regarding the tax provisions for 2023, check out
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