Tax season can be stressful. The IRS makes changes to the tax code every year. One of them is how your income tax is calculated. The United States uses a progressive tax system that is made up of seven tax brackets or margins. As you may have noticed, the more you make, the more you pay in taxes. We’ll explain why in this article.
Filing your taxes accurately and on time is critical. You’ll avoid fines and penalties if you file your personal income taxes by the April 15th deadline. Business taxes are due quarterly. Making those deposits when they’re due can prevent financial unmanageability at the end of the year. You could end up owing significantly more if you fail to do that.
Taxable income and deductions
Your income includes wages, salary, tips, and commissions. Some of these types of income may be taxed before you receive them. Capital gains on stocks or real estate, social security benefits, and unemployment checks also count as income. They’re generally not taxed before you get them, but you should receive a 1099 stating how much you were paid.
The total amount you make for the year is your “gross income.” That’s not what you’re taxed on. Contributions to employer-sponsored retirement plans are tax-deferred, so they bring the number down. The mortgage interest deduction or a deduction for working from home, could lower it even further. After all deductions, your final number is your “taxable income.”
Progressive tax systems and marginal tax rates
The progressive tax system used in the United States is broken down into seven income brackets, also known as margins. Last year, the lowest income bracket for single people was $0–$11,000. The income tax on that was 10%. Anything between $11,001 and $44,726 was taxed at 12%. This progression continues through five more brackets after that.
The highest tax rate hit by an individual is called the “marginal tax rate.” For instance, an individual making $30,000 a year would have a marginal tax rate of 12%. The U.S. government uses margins to ensure wealthier taxpayers pay a higher percentage than those with lower incomes. The charts below illustrate how our tax system works.
Income tax brackets for 2023
The IRS uses seven federal income tax brackets in our progressive tax system: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The amount of taxes you owe will depend on your filing status and taxable income. The 2023 federal tax brackets are as follows:
| Marginal rate | Individual income | Married filing jointly income |
| 10% | $11,000 or less | $22,000 or less |
| 12% | $11,001 to $44,725 | $22,001 to $89,450 |
| 22% | $44,726 to $$95,375 | $89,451 to $190,750 |
| 24% | $95,376 to $182,100 | $190,751 to $364,200 |
| 32% | $182,101 to $231,250 | $364,201 to $462,500 |
| 35% | $231,251 to $578,125 | $462,501 to $693,750 |
| 37% | $578,126 or more | $693,751 or more |
Income tax brackets for 2024
The seven tax brackets are adjusted for inflation each year. You’re filing taxes now for what you earned in 2023, so use the chart above. The chart below shows what your income brackets will look like for the 2024 tax year. You’ll file your taxes next year based on these numbers.
| Marginal Rate | Individual income | Married filing jointly income |
| 10% | $11,600 or less | $23,200 or less |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 |
| 22% | $47,151 to $$100,525 | $94,301 to $201,050 |
| 24% | $100,526 to $191,950 | $201,051 to $383,900 |
| 32% | $191,951 to $243,725 | $383,901 to $487,450 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 |
| 37% | $609,351 or more | $731,201 or more |
How does this affect your business?
There are several ways that marginal tax rates can affect your business. One of them is the availability of liquid assets. When people pay more in taxes, they tend to have less to spend or invest. Of course, that’s offset if income goes up.Your marginal tax rate as a business owner also affects your business. More expensive tax liabilities may change the way that you operate your company. It’s a good idea to work with an accountant to maximize your tax deductions and minimize your tax liability. Many business owners also use accounting software to help eliminate tax filing mistakes.
