What is my tax bracket?
Your tax bracket determines the rate at which your income is taxed. How much of your income is taxed depends on your state of residence and filing status, which may be as single, married filing jointly (or qualifying widow(er)), married filing separately or head of household. Brackets are expressed by a “marginal” tax rate, which refers to the rate at which your next dollar of income will be taxed. The current six marginal rates for federal income taxes are: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent. You can figure out your federal tax bracket and estimated taxes here.
The IRS introduced this progressive, bracketed income tax system a century ago and designed it to allow lower-income individuals to pay a lower overall percentage of tax on their total income than wealthier individuals. In addition to flexible brackets, dependant deductions and credits like the Earned Income Tax Credit (EITC) were introduced to ensure that the lowest-income families would not be overtaxed. As a result, over 43 percent of Americans owe no income tax today after accounting for all of their deductions and tax credits.
Forty-four of the 50 states collect a state income tax, most of which are lower than the federal income tax. The highest marginal tax bracket in any state is just over 13 percent (California).
While most states use a bracketed system similar to the federal income tax, some use a flat income tax that collects a single percentage of total income. You can determine your state income tax rate here.
It is important to know your federal and state income tax brackets (and consider your projected future brackets) for budgeting and financial planning purposes, especially if you are self-employed and required to pay taxes quarterly. Obviously, the higher your tax brackets, the more focused you should be on maxing out tax-advantaged investment accounts such as 401(k)s, IRAs and 529 college savings plans. You should also consider consulting an experienced tax professional to discuss your specific financial situation and how you can maximize your tax savings.