Are you aware of your tax bracket? Even if you are, do you fully understand its implications for the taxes you will be responsible for paying?
In brief: Your tax rate is determined by the percentage of your income that goes to taxes, but this rate varies across your total earnings. Different portions of your income are taxed at designated rates, referred to as tax brackets.
For the tax years 2025 and 2026, there exist seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The Internal Revenue Service (IRS) applies annual inflation adjustments to the income limits that define each bracket.
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Note: Income thresholds for the “married filing separately” tax status for 2026 have not yet been released by the IRS.
It’s important to remember that capital gains tax brackets differ from the federal income tax rates outlined above. Most capital gains are taxed at rates of 0%, 15%, or 20%, which depend on your total taxable income.
Explore further: How much capital gains tax you’ll pay when you sell a home
The U.S. operates under a progressive tax system. This means that as your income increases, the total amount of individual income tax you pay also rises.
As higher earners face higher tax rates, some taxpayers fear that a salary increase will elevate them into a higher tax bracket. However, this concern is based on a common misunderstanding regarding tax brackets and rates.
There are two primary types of tax rates: marginal and effective.
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Marginal tax rate: Your marginal tax rate refers to the percentage of income tax you owe on your last dollar earned.
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Effective tax rate: This is the percentage of your income that you ultimately pay in taxes to the IRS.
Your marginal tax rate differs from your effective tax rate because your income is taxed at various rates. Visualize tax brackets as a set of buckets. Once one bucket fills to capacity, the additional amount spills over into the next.
For instance, consider a single taxpayer with a taxable income of $40,000 in 2026. According to the federal income tax brackets, this individual’s marginal tax rate is 12%.
Calculating your effective tax rate, however, entails a more complex process. Here’s a breakdown of how tax would apply to an income of $40,000 in 2026:
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You would pay 10% on the first $12,400, totaling $1,240.
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For the next $27,600 ($40,000-$12,400), you’d owe 12%, amounting to $3,312.
Your total tax bill would be $4,552, resulting in an effective tax rate of 11.4% on your $40,000 income.
Now, imagine receiving a $15,000 raise, elevating your income to $55,000. This would raise your marginal rate from 12% to 22%, which seems significant at first. However, since only specific sections of your income are taxed at varying rates, the increase is not as drastic. Here’s how your taxes would be calculated:
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You’d owe 10% on the initial $12,400, which equals $1,240.
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You’d owe 12% on the next $38,000 ($50,400-$12,400), totaling approximately $4,560.
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For the remaining $4,600 ($55,000-$50,400), you would be taxed at 22%, about $1,012.
Your overall tax liability amounts to $6,812, yielding an effective tax rate of roughly 12.4%. Despite being placed in a higher tax bracket, your effective tax rate has only marginally increased since the bulk of your income is taxed at lower rates.
Nevertheless, this example is somewhat simplified. Federal income taxes aren’t the sole taxes you face. Most individuals contribute 7.65% of their income toward Social Security and Medicare taxes—and 15.3% if self-employed. It also doesn’t factor in state and local taxes, sales taxes, or property taxes.
In summary, being shifted into a higher federal tax bracket isn’t necessarily negative. While you may have a larger tax obligation, you’re also receiving more in your paychecks.
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No one enjoys paying taxes, so it’s generally advisable to minimize your taxable income. Below are some methods to help reduce your tax liability.
Consider the standard deduction versus itemized deductions
When filing your taxes, you’ll need to decide whether the standard deduction or itemized deductions would give you a greater reduction in your taxable income.
The standard deduction for single filers in 2026 stands at $16,100, while for married couples filing jointly, it is $32,200. Should you choose the standard deduction, you can subtract the full amount for your filing status from your taxable income.
On the other hand, itemizing might be more beneficial if you incurred significant mortgage interest, made large charitable donations, or had unreimbursed medical expenses exceeding 7.5% of your adjusted gross income. Consulting with a tax professional can help clarify which option is best for your circumstances.
Lowering your taxable income is also possible by contributing to a workplace retirement plan, such as a 401(k) or 403(b). Keep in mind that only pre-tax contributions will effectively lower your taxes, while withdrawals will be taxed as normal income. If you invest in a Roth account, you won’t receive a tax deduction for the current year, but you’ll benefit from tax-free withdrawals during retirement.
A tax deduction decreases your taxable income. Some deductions are considered above-the-line, meaning you can claim them regardless of whether you itemize. Common above-the-line deductions include:
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Traditional IRA contributions: You might be eligible to deduct contributions to a traditional IRA, subject to income limits if you or your spouse have an employer retirement plan. You have until Tax Day to fund an IRA for the applicable tax year, meaning that contributing to a traditional IRA before April 15, 2026, could help lower your tax bill for 2025.
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Student loan interest: Should you have paid interest on your student loans, you can deduct up to $2,500 of interest paid, though income limits apply.
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Health savings account (HSA) contributions: You can write off HSA contributions regardless of whether you opt to itemize. Plus, your withdrawals are never taxed if they’re used for eligible medical expenses. Similar to IRA contributions, you can fund your HSA until Tax Day, which allows for 2025 contributions to be made until April 15, 2026.
If you’re self-employed, you might qualify for additional tax deductions specifically for small-business owners.
Tax credits are even more advantageous than deductions, as they directly subtract from the taxes owed on a dollar-for-dollar basis. With refundable credits, any excess beyond your tax liability can be issued as a refund. Here are several popular tax credits you may qualify for in 2025:
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Child tax credit: The child tax credit allows for up to $2,200 per qualifying dependent child under 17. The additional child tax credit, which is refundable, can provide up to $1,700.
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Child and dependent care credit: If you employed someone to care for your child under 13 or a dependent unable to care for themselves while you worked or looked for work, you might qualify for the child and dependent care credit. The credit ranges from 20% to 35% of your expenses, capped at $3,000 for one dependent or $6,000 for two or more dependents.
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Earned income tax credit: The earned income tax credit (EITC) aids lower- and middle-income families who earned income throughout the year. The maximum benefit ranges from $649 for those without qualifying children ($664 in 2026) to $8,046 ($8,231 in 2026) for families with three or more qualifying children.
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Education tax credits: If you incurred expenses for higher education for yourself or a dependent, you might be eligible for one of two education tax credits: the American Opportunity Tax Credit, up to $2,500 per qualified student, or the Lifetime Learning Credit, worth up to $2,000 per tax return. Both can be claimed in a single return, though only one credit can be claimed per student/expense.
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EV credit: If you purchased a new electric vehicle by September 30, 2025, you might be eligible for a tax credit of up to $7,500. Additionally, a credit up to $4,000 is available for individuals who purchased a used EV costing less than $25,000 from a dealership.
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Saver’s credit: The saver’s credit is aimed at low- and middle-income individuals who save for retirement in plans like a 401(k) or an IRA. The maximum credit can reach $1,000 for single filers or $2,000 for married couples filing jointly.
Make it clear: Understanding tax credits vs tax deductions
To ascertain which tax bracket you belong to, you need to be aware of your tax filing status and your taxable income. For traditional employees, the first step in determining your taxable income lies in checking Box 1 of your W-2 form. If you are self-employed, refer to the Forms 1099-NEC that you have received. Additionally, you may need to factor in other taxable income sources like interest income, capital gains, or Social Security income.
Once you establish your taxable income, you can consult the IRS tax bracket tables to see where your income aligns. Your tax bracket reflects your marginal tax rate, which is the rate applicable to the last dollar you earned. Conversely, your effective tax rate—the overall percentage of your income that goes to taxes—will be lower since various income portions are taxed at different rates that progressively increase.
Keep in mind, you won’t be able to precisely determine your tax brackets for 2024 or 2025 until all your tax information has been received for those years. Employers must issue W-2 forms by January 31 for the previous year, so you will have the necessary information for assessing your 2025 tax bracket around that date. However, a recent pay stub may allow you to estimate your taxable income and corresponding tax bracket.
Is taxable income the same as gross income?
No, gross income serves as the initial basis for calculating taxable income. To arrive at your taxable income, substract any above-the-line deductions, such as retirement contributions or student loan payments, from your gross income to find your adjusted gross income. Subsequently, apply either the standard or itemized deductions to derive your taxable income.
How can I reduce my tax bracket?
To lower your tax bracket, make maximum contributions to tax-advantaged accounts like 401(k)s, IRAs, and HSAs, and explore potential deductions and credits you may qualify for. Discuss with your tax preparer about whether it’s more beneficial to itemize your deductions or opt for the standard deduction.
Which states have the highest tax rates?
TurboTax indicates that, as of 2024, California, Hawaii, New York, New Jersey, and Oregon have the highest tax rates.
