Tax Rates: What You Need to Know

A tax rate is a percentage at which an individual or corporation is taxed. The federal government and many states impose a progressive tax rate system in the United States. Under this system, the percentage of tax charged increases as the amount of the person’s or entity’s taxable income increases. Consequently, a progressive tax rate collects more from taxpayers with higher incomes.

To help build and maintain the infrastructure, a government taxes its residents. Subsequently, the tax collected is used for the betterment of the nation, society, and all living in it. In both the U.S. and other countries, a tax rate is applied to taxpayer income. A portion of earnings is sent to the government, whether they originate from wages or salaries, dividends and interest, capital gains, or sales.

Specifically for income tax, the tax rate is the percentage of an individual’s taxable income or a corporation’s earnings owed to state, federal, and, in some cases, municipal governments. Moreover, the tax rate applied to an individual’s earnings depends on the marginal tax bracket. This reflects the U.S. government’s progressive tax system.

Individual tax rate dollar thresholds vary depending on filing status: single, head of household, married filing separately, or married filing jointly.

The marginal tax brackets for 2022 and 2023 are:

The following taxes apply to a single $62,000 earner in 2023: 10% on the first $11,000, 12% on the following $33,725 (up to $44,725), and 22% on the remaining $17,275 (up to $95,375), totaling $8,947.50. Another person earning $160,000 will be taxed 10% on the first $11,000, 12% on the following $33,725, 22% on the next $50,650 (from $44,725 to $95,375), and 24% on the final $64,625 (from $95,375 to $182,100), totaling $31,800.

Following this example, the single taxpayer who falls under the third marginal tax bracket will pay less tax than the single filer who falls in the fourth and higher bracket.

A marginal tax rate means that different portions of income are taxed at progressively higher rates. Due to the marginal tax computation, these taxpayers in the third and fourth marginal bands do not pay flat rates of 22% and 24% on all of their income. If they did, the first individual would pay 22% x $62,000 = $13,640; the second would pay 24% x $160,000 = $38,400. In total, individual A pays an effective rate of 14.4% ($8,947.50 ÷ $62,000), and the individual with the higher income pays a rate of 19.9% ($31,800 ÷ $160,000). These rates are called effective tax rates and represent the actual percentage at which the tax is levied during a tax year.