Breaking down the tax brackets
Each bracket of your income is taxed at a different rate. As you make more money, a higher percentage may be owed in taxes.
Taxable income, single filer
Tax rate
10% $9,950 or less
12% $9,950.01 to $40,525
22% $40,525.01 to $86,375
24% $81,050.01 to $172,750
32% $164,925.01 to $209,425
35% $209,425.01 to $523,600
37% Over $523,600
Taxable income, married and filing jointly
Tax rate
10% $19,990 or less
12% $19,900.01 to $81,050
22% $81,050.01 to $172,750
24% $172,750.01 to $329,850
32% $329,850.01 to $418,850
35% $418,850.01 to $628,300
37% Over $628,300
Source: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021
So what does this mean?
Joe is single and has $50,000 in taxable income. Let’s calculate his taxes.
From $0 to $9,950, Joe is taxed at 10%.
$9,950 x 10% = $995
From $9,951.01 to $40,525, Joe is taxed at 12%.
$30,573.99 x 12% = $3,669
From $40,525.01 to $50,000, Joe is taxed at 22%.
$9,474.99 x 22% = $2,084
TOTAL TAX = $6,748
Joe’s marginal tax rate—the rate he pays on his top bracket—is 22%. But in reality, Joe’s tax liability—his effective tax rate—is about 13% of his taxable income.
Lisa is single and has $100,000 in taxable income.
From $0 to $9,950, Lisa is taxed at 10%.
$9,950 x 10% = $995
From $9,951.01 to $40,525, Lisa is taxed at 12%.
$30,573.99 x 12% = $3,669
From $40,525.01 to $86,375, Lisa is taxed at 22%.
$45,849.99 x 22% = $10,087
From $86,375.01 to $100,000, Lisa is taxed at 24%.
$13,625 x 24% = $3,270
TOTAL TAX = $18,021
Lisa’s marginal tax rate is 24%. But in reality, Lisa’s tax liability gives her an effective tax rate of about 18%.
Say Lisa and Joe fall in love and get married. They decide to file a joint tax return, with a combined taxable income of $150,000.
The first $19,900 they make is taxed at 10%.
$19,900 x 10% = $1,990
From $19,900 to $81,050, they are taxed at 12%.
$61,159 x 12% = $7,338
From $81,050.01 to $150,000, they are taxed at 22%.
$68,950 x 22% = $15,169
TOTAL TAX = $24,407
If they had stayed single, Joe and Lisa would have paid a combined $24,769. Filing jointly saves them $362, sometimes referred to as a “marriage benefit.”
If Joe and Lisa’s tax liability had been higher as a married couple filing jointly, the extra funds owed would be referred to as a “marriage penalty.”
But that’s not all ...
Different credits and deductions based on life events could affect Joe and Lisa’s tax liability.
If they start a family, they may qualify for new deductions and child care credits, and their tax liability would likely shrink.
