Here's what you need to know about tax brackets in 2020 and beyond.
IMPORTANT: The U.S. government has extended tax season, pushing the deadline back to July 15.
Why do we have tax brackets?
Tax brackets are an integral part of what's referred to as America's progressive tax system. As you earn more money, your income hits thresholds. At each threshold, the income above the line is taxed at a progressively higher rate.
When looking at the brackets, it's essential to remember that the income triggering each tax rate is your adjusted gross income, not the figure on your W-2.
In other words, your ultimate tax bill is based on your taxable income: wages and other income, such as interest, minus deductions and credits.
The complexity has long resulted in calls for a simpler income tax system, such as a flat tax rate.
What are the current tax brackets?
These are the brackets for the taxes you pay in 2020, on income earned in 2019.
|Up to $9,700||10%|
|$9,701 to $39,475||12%|
|$39,476 to $84,200||22%|
|$84,201 to $160,725||24%|
|$160,726 to $204,100||32%|
|$204,101 to $510,300||35%|
|Up to $19,400||10%|
|$19,401 to $78,950||12%|
|$78,951 to $168,400||22%|
|$168,401 to $321,450||24%|
|$321,451 to $408,200||32%|
|$408,201 to $612,350||35%|
What does that all mean?
Here's how the tax brackets work: If you file as a single and make $9,000, your tax rate is 10%. If you earn $30,000, your first $9,700 is taxed at 10%, while the remaining $20,300 carries a 12% tax. And so on.
As you make more money, you'll want to take steps to reduce your taxable income and drop down into a lower tax bracket. Directing some of your earnings into an individual retirement account (IRA) might do this.
You may need to speak with an accountant or tax professional, such as at the nearest H&R Block office.