The IRS uses a progressive tax system which means that different portions of your income are taxed at different rates. Most people think that whatever their bracket is, they pay that percentage for all of their income. This is FALSE.

You DO NOT pay the highest rate on ALL of your income. Just the portion that falls into that bracket.

Your bracket will vary by your Filing Status which are: Single, Married Filing Jointly, Married Filing Separately, Head of Household, or Qualifying Surviving Spouse. Each filing status will have it’s own bracket with Married Filing Separately being the least advantageous and Married Filing Jointly being the most advantageous.

And lastly, your income is taxed after all of your deductions and credits. So just your taxable income is “taxed”, not your gross income.

For example, a married couple filing jointly would have a tax bracket of:

10% $0 – $23,200
12% $23,201 – $94,300
22% $94,301 – $201,050
24% $201,051 – $383,900
32% $383,901 – $487,450
35% $487,451 – $731,200
37% $731,201 and higher

If a couple makes $250,000 for the year (with no deductions or credits), this is how much tax they would owe:

$2,320 = 10% on $23,200
$8,532 = 12% on $71,099 ($94,300 – $23,201)
$23,485 = 22% 0n $106,749 ($201,050 – $94,301)
$11,748 = 24% on $48,950 (250,000 – $201,150)

$2,320 + $8,532 + $23,485 + $11,748 = $46,115 Federal Taxes on $250,000 Total Income

So if a couple filed MFJ on $250,000, most people would just multiply 24% by their $250,000 combined income which would be $60,000. This would be incorrect. But because of the progressive tax system the IRS uses, the taxes are actually $46,115.