Tax brackets determine the rate at which income is taxed from "summary" of Income Tax Fundamentals 2021 by Gerald E. Whittenburg,Martha Altus-Buller,Steven Gill
Tax brackets are an essential element of the income tax system, as they play a crucial role in determining the rate at which income is taxed. The U. S. tax system is progressive, which means that as a taxpayer's income increases, so does the tax rate applied to that income. This progressive structure is achieved through a series of tax brackets, each with its own corresponding tax rate. When a taxpayer earns income, it is first categorized into different tax brackets based on specific income thresholds. Each tax bracket has a set tax rate that applies to income falling within that range. For example, income up to a certain amount may be taxed at a lower rate, while income above that threshold is taxed at a higher rate. As a taxpayer's income increases and moves into higher tax brackets, the portion of income taxed at the higher rate will also increase. This means that the more a taxpayer earns, the more they will pay in taxes as a percentage of their total income. Understanding tax brackets is essential for taxpayers to accurately calculate their tax liability and effectively plan for their financial future. By knowing which tax bracket their income falls into, taxpayers can anticipate how much of their income will be subject to taxation at various rates. This knowledge can help taxpayers make informed decisions about their finances and potentially minimize their tax burden through strategic planning.- Tax brackets are a fundamental component of the income tax system, as they determine the rate at which income is taxed based on specific income thresholds and corresponding tax rates. By understanding how tax brackets work, taxpayers can better navigate the complexities of the tax system and make informed decisions to manage their tax liabilities effectively.