The United States has a progressive income tax system in which tax rates increase as income increases. It can be confusing, but knowing the bracket your income falls into can be a big help in many financial decisions.

To achieve a progressive tax system, Congress divided income into seven levels—or brackets—and assigned increasing tax rates to each subsequent bracket. The IRS adjusts the income levels applicable for each bracket each year for inflation. Here are the 2023 brackets for single filers.

Source: IRS.gov

Your marginal tax rate is the rate applied to your last dollar of income. You can learn it by looking at the IRS tables. Let’s say you’re single and have taxable income of $75,000 a year. As you can see from the table above, that puts your marginal rate at 22%.

It’s important to remember that the marginal rate is applied only to income that falls in that bracket. Income falling in the lower brackets is taxed at the lower rates. This means the actual tax rate that you pay on your taxable income—called your effective tax rate—is lower than the marginal rate. In this case, it’s 15.7%.

For a single filer who has $75,000 in taxable income

Determining your effective rate takes some math. Here are the steps for a single filer who has $75,000 in taxable income:

Determine how much of your income falls in each tax bracket and multiply the amount by that bracket’s rate.

Sample taxable income = $75,000

Add those results to get the total tax

Divide the total tax by the taxable income

There are different sets of brackets for each filing status. Single is the most common, followed by married filing jointly. The IRS has detailed breakdowns for each filing status. Here’s a summary of the brackets for the other filing statuses.

Knowing your tax bracket, marginal tax rate and effective tax rate can equip you with valuable information for financial planning and budgeting. The effective rate is important in determining how much to withhold from your paycheck or to pay in estimated taxes. The marginal tax rate helps you plan for the tax impact of year-over-year changes in income.

Knowing where you fall in your top tax bracket can affect how you handle actions that affect your taxable income, such as charitable donations and contributions to or withdrawals from retirement plans. For example, a big charitable donation could reduce your income enough to move you into a lower bracket. On the other hand, a withdrawal from a retirement plan could push you into a higher bracket. Consult a tax professional for detailed guidance.