It’s a common misnomer that bringing in more income leads to a higher tax on all of your income. The truth of it is, you don’t pay the same rate across all of your income. As you earn more, you pay a different rate after each milestone for buckets of income. This ensures that any time you make more money, you are guaranteed to bring in additional income, albeit, potentially at a higher tax rate. This is called progressive tax brackets.
Where Did Progressive Tax Brackets Come From?
This was not true until the Revenue Act of 1862 was signed into law by Abraham Lincoln creating the framework for the progressive tax brackets we have today. At the time, the Revenue Act of 1862 was a way for the federal government to raise funds to support their fight against the Confederacy during the Civil War. This shift from a nominal tax rate of 3% to a 5% tax on all income over $10,000 generated nearly $340 million over the next ten years. The bill was repealed in 1872 and the progressive tax brackets did not reappear until the passing of the 16th Amendment in 1913.
How Do Progressive Tax Brackets Work?
Progressive tax brackets are designed to tax higher earners at a higher rate than lower earners. The methodology here relies on two premises: 1) Every income earner will pay the same tax rate on the money they bring in and 2) that higher earners can afford to pay higher tax rates over certain thresholds.
Below are the current 2020 federal progressive tax brackets. These will often change at the behest of government officials as part of the fiscal policy used to maintain consistent inflation and a growing economy.
| Rate | Single Filers | Married Filing Jointly or Widow | Married Filing Separately | For Heads of Households |
| 10% | Up to $9,875 | Up to $19,750 | $0 to $9,875 | Up to $14,100 |
| 12% | $9,876 to $40,125 | $19,751 to $80,250 | $9,876 to $40,125 | $14,101 to $53,700 |
| 22% | $40,126 to $85,525 | $80,251 to $171,050 | $40,126 to $85,525 | $53,701 to $85,500 |
| 24% | $85,526 to $163,300 | $171,051 to $326,600 | $85,526 to $163,300 | $85,501 to $163,300 |
| 32% | $163,301 to $207,350 | $326,601 to $414,700 | $163,301 to $207,350 | $163,301 to $207,350 |
| 35% | $207,351 to $518,400 | $414,701 to $622,050 | $207,351 to $311,025 | $207,351 to $518,400 |
| 37% | $518,401 or more | $622,051 or more | $311,026 or more | $518,401 or more |
Progressive Tax Brackets in Practice
It’s clear that progressive tax brackets are designed to keep taxes down on lower-income earners and generate more tax revenue on high-earners, but how does it work in practice?
As an example, let’s use a single filer earning $215,000 to calculate their federal tax impact.
| Rate | Remaining Income | Tax Calculation | Tax Impact | Single Filers |
| 10% | $215,000 | $9,875 x 10% | $987.50 | Up to $9,875 |
| 12% | $205,125 | ($40,125 – $9,875) x 12% | $3,630.00 | $9,876 to $40,125 |
| 22% | $174,875 | ($85,525 – $40,125) x 22% | $9,988.00 | $40,126 to $85,525 |
| 24% | $129,475 | ($163,300 – $85,525) x 24% | $18,666.00 | $85,526 to $163,300 |
| 32% | $51,700 | ($207,350 – $163,300) x 32% | $14,096.00 | $163,301 to $207,350 |
| 35% | $7,650 | ($215,000 – $207,350) x 35% | $2,677.50 | $207,351 to $518,400 |
| 37% | $0 | $0 x 37% | $0 | $518,401 or more |
| Total Tax Impact | $50,045.00 |
The above single filer earning $215,000 will end up owing $50,045 in federal taxes over the year, before any deductions and write-offs. Hopefully, this clearly showcases that each bucket of income is subject to different tax rates that are added together for your overall personal tax impact. This example is meant to show how progressive tax brackets work, but there are other considerations that will impact your actual taxes.
Additional Tax Considerations
Below are a few additional considerations that may apply to your taxes. Each person’s tax situation is unique and you should consult a tax accountant with any questions.
- How many dependents are you declaring?
- What is your standard deduction?
- Are you married and filing jointly or separately?
- Do you have debt interest rates that you can write-off, such as student loans?
- Do you have business expenses?
- Have you contributed to pre-tax funds, such as a 401K or IRA, that should not be included in your tax calculation?
- Don’t forget you also will owe state income taxes (for most states)
Calculate Your Own Tax Estimate
Now that we have a better understanding of how progressive tax brackets work, mess around with this tax calculator to estimate your taxes for this year.
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