What You Need to Know to Understand U.S. Income Tax Rates

In the United States, income tax plays a large role in our financial lives because every year we must pay both the federal government and our state government. At the federal level, the income tax rates are what is referred to as progressive. To state it in a very basic way, this means that the more income you earn, the higher your taxes will be. Of course, this only counts taxable income. By claiming the right deductions, both standard and itemized, along with any personal exemptions that you are eligible for, you can reduce the amount of your income that is taxable, thus instantly lowering the amount of taxes that you owe for that year. Right now, the United States has six tax brackets and has had these six brackets since 2001. These tax brackets are always set by both Congress and the current President in accordance with section 1 of the Internal Revenue Code. The Internal Revenue Service is responsible for adjusting these rates to take inflation into account. Until those tax brackets are changed, the income tax rates are set at: 10%, 15%, 25%, 28%, 33% and 35% at the very highest levels of income. The reason for this progressive taxation system is to reduce the burden on those at lower income levels, relying on the nation's top earners to provide the bulk of federal tax revenue. It is very important to understand that these income tax rates are not applied to all of your income at the same time. If, for instance, you had several million dollars in taxable income, you would not pay a flat rate of 35% on all of that income simply because you fell into the top tax bracket. Instead, you would pay your taxes at each of the rates until approximately $370,000. Everything over $370,000 would then be taxed at 35%. Understanding this helps clear up the misconception that those who earn more actually pay a higher rate of tax. In fact, those who earn more only pay that higher percentage of tax on a certain part of their taxable income. Of course, the right tax specialists can do a lot to help lower the tax rate you end up paying, too. Proper knowledge of the details within the federal tax codes can go a long way towards reducing the amount a taxpayer must pay in.

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