“Inflation” seems to be a bad word these days as the prices we pay move higher. But there are some silver linings, too. We can all likely agree that one positive outcome of inflation is a big jump in 2023 tax brackets, which are the thresholds at which the amount of tax you will owe increase.
The U.S. tax code can be a little tricky to understand, in part because it’s a progressive system in which you may owe different percentages of tax on different parts of your earnings. While it’s pretty easy to figure out your tax bracket based on your income, it’s harder to calculate how much you’ll actually owe. We’ll explain how to do that in a moment. But first, here are the tax brackets for 2023, represented as the percentage of tax you’d pay on each portion of your income.
2023 tax brackets
If you’re single (known as an individual filer), your brackets are:
10 percent: Up to $11,000
12 percent: $11,001 to $44,725
22 percent: $44,726 to $95,375
24 percent: $95,376 to $182,100
32 percent: $182,101 to $231,250
35 percent: $231,251 to $578,125
37 percent: Over $578,125
People who are married but file separately (known as married filing separately) have the same tax brackets as individual filers do until the top two. Those amounts are:
35 percent: $231,251 to $346,875
37 percent: Over $346,875
If you are married and file a single tax return as a couple (known as married filing jointly), your brackets are:
10 percent: Up to $22,000
12 percent: $22,001 to $89,450
22 percent: $89,451 to $190,750
24 percent: $190,751 to $364,200
32 percent: $364,201 to $462,500
35 percent: $462,501 to $693,750
37 percent: Over $693,750
If you are unmarried, pay for more than half your household’s expenses and have a dependent (known as head of household), your brackets are:
10 percent: Up to $15,700
12 percent: $15,701 to $59,850
22 percent: $59,851 to $95,350
24 percent: $95,350 to $182,100
32 percent: $182,101 to $231,250
35 percent: $231,251 to $578,100
37 percent: Over $578,100
Calculating your marginal tax bracket vs. your effective tax rate
What you owe in taxes is the income on your W-2 form multiplied by your tax bracket percentage, right? Unfortunately, it’s not that simple.
For starters, the income on your W-2 isn’t likely to be the amount that is actually taxed. That’s because when you file, you’re probably going to take deductions that will lower your taxable income. You may choose to take the standard deduction (which is $13,850, or $27,700 if you’re filing jointly) or a host of other deductions you choose to itemize on your tax return. Your 1040 form helps you determine what your taxable income will be.
Second, the U.S. income tax system is a progressive tax, not a flat tax. That means as your income rises, so does the percentage that you pay in taxes — and your income is actually taxed in chunks at graduated rates that follow the steps of the tax brackets.
Here’s a simple example of what we mean. Let’s say you’re single, and after deductions, your taxable income is $50,000, which lands you in the 22 percent tax bracket. You won’t be paying 22 percent on all $50,000 (which would be $11,000 in federal tax). Rather …
• The first $11,000 will be taxed at 10 percent, which is $1,100.
• The income between $11,001 and $44,725 (or $33,725) will be taxed at 12 percent, or about $4,047.
• The income between $44,726 and $50,000 (or $5,274) will be taxed at 22 percent, or about $1,160.
So in this example, your total 2023 federal income tax owed would be $6,307 ($310 less than you would have paid on the same income last year).
Your marginal tax bracket is the tax rate you paid on your last dollar of income and is how you determine which tax bracket you’re in. Your effective tax rate, meanwhile, is the percentage of your income that you paid in taxes after all was said and done — in this case, a little less than 13 percent ($6,307/$50,000).
Changing tax brackets
Of course, your tax bracket and effective tax rate aren’t something that you figure out once and then never again. For instance, if you got a raise in the last year, it could push you into the next higher tax bracket (that’s why the tax brackets also increase over time). On the flip side, if your income drops or you become eligible to take more deductions, you could fall into a lower tax bracket. So make sure you check each year to see what the new tax brackets are and how that could impact the amount you will pay.
This publication is not intended as legal or tax advice. Consult with a tax professional for tax advice specific to your situation.