Tax Brackets: How To Stay Within The Margins

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There are two things in life that can’t be avoided. One of them is taxes (I bet you already know what the other thing is). Before you became an adult you probably heard your parents or other adults talk about taxes but you never paid much attention to them yourself because they didn’t apply to you. Now they do apply, and you are wondering how it all works.

The United States has a progressive tax system for income taxes. What this means is that the lower your income is, the lower the amount of taxes you will pay. There is also something called a regressive tax system which refers to a tax that you pay regardless of your income level. An example of a regressive tax is sales tax because everyone has to pay it when they buy a good or service regardless of whether they can afford it.

For your federal taxes (as of the 2020 tax year), once you earn at least $12,200 as a single person ($18,350 for filing head of household and $24,400 if you are married filing jointly) in a calendar year, you are required to file a tax return and pay taxes on your income. What you may not realize is that not every dollar you earn is taxed at the same rate.

As part of our progressive tax system, we have something called Marginal Tax Brackets. Marginal Tax Brackets break income into levels and assign a tax percentage rate to each level. The higher the income level, the higher the tax percentage rate. 

2020 Federal Graduated Tax Brackets


  • Single Filer
    • $0-$9,875: 10% 
    • $9,876 – $40,125: 12% 
    • $40,126 – $85,525: 22%
    • $85,526 – $163,300: 24%   
    • $163,301 – $207,350: 32%
    • $207,351 – $518,400: 35% 
    • $518,401+: 37%      
  • Married Joint Filers
    • $0 – $19,750: 10%
    • $19,751 – $80,250: 12%
    • $80,251 – $171,050: 22%
    • $171,051 – $326,600: 24%
    • $326,601 – $414,700: 32%
    • $414,701 – $622,050: 35%
    • $622,051+: 37%

Have you got this visualized yet? If not, the following examples of two sets of taxpayers show you how the first dollar earned is taxed at a lower rate than the last dollar. Note that our taxpayers are being taxed on their Adjusted Gross Income (AGI) instead of their initial Gross Income. The difference between your Gross Income and your AGI is your deductions, the most common being the Standard Deduction allowed each year by the Internal Revenue Service ($12,200 for single filers and $24,000 for married joint filers as of 2020). Tax deductions lower the amount of income a person is taxed upon which means that a portion of the income you earn every year is tax free! In the examples, because of the standard deduction, the single taxpayer gets approximately 37.2% and the married taxpayers get approximately 30% of their Gross Income tax free.

Federal Marginal Tax Examples

In this chart, you can see that, after subtracting the standard deduction and the tax credits, the single and married taxpayers each paid out of pocket only a little more than 5% of their total income in federal taxes. This percentage, known as your Effective Tax Rate, is calculated by dividing your final income tax by your Gross Income. So even though your last dollar earned may be in the 22% marginal tax bracket, for example, the actual tax you pay may be a far lower percentage of your total income. 

If you don’t want to wait until tax time to minimize how much you pay in taxes to the Government, your best solution is to make sure that you are having the correct amount of withholdings taken from your paycheck (note that 1099 contractors do not have automatic withholdings from their pay and should consult a tax advisor for advice on how to pay their taxes throughout the year).  You can adjust your withholdings by completing IRS Form W-4 and giving it to your company’s human resources department.

The bottom line is that if you know each pay period exactly how much tax you need to pay the Government, you can keep more money in your pocket during the year for yourself!

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Know all your information

Make sure your federal and state withholdings in your paycheck are accurate. The Internal Revenue Service has a calculator you can use to determine what your withholding amounts should be. If you need to change your withholdings, complete IRS form W-4 and give it to your company’s HR department.


Contribute regularly to a retirement savings plan

The IRS offers a non-refundable tax credit for contributions to a retirement plan up to an annual maximum contribution of $2,000 for people with annual incomes up to $32,500 (single filers) to $62,500 (married joint filers). Tax credits are valuable because they reduce your tax bill dollar for dollar.


Don’t forget about state income taxes

Don’t forget about your state income taxes if you live in a state that has income taxes. Individual states also use progressive income tax brackets but the individual brackets may be grouped differently than the federal government’s tax brackets.

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About the Author

Dawn Torres-Gale, AFC

Dawn Torres-Gale, AFC

Accredited Financial Counselor

In 2008, Ms. Torres-Gale was chosen by the Financial Industry Regulatory Authority (FINRA) Foundation to be part of a select group of military spouses. Through this, she received FINRA sponsored training from the Association of Financial Counseling, Planning and Education and became an Accredited Financial Counselor® in February 2012.
Full Bio | Connect With Dawn | LinkedIn

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