The federal income tax system is progressive, which means that different tax rates apply to different portions of your taxable income. The term "tax bracket" refers to the highest tax rate applied to the top portion of your taxable income and depends on your filing status. Here's how to calculate your tax bracket.

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### Progressive system, marginal rates

The federal income tax is progressive, meaning that tax rates increase as your taxable income goes up.

For example, in 2020,

• Income was taxed at seven different rates:
• 10, 12, 22, 24, 32, 35 and 37 percent.
• These are marginal rates, meaning that each rate applies only to a specific slice of income, rather than to your total income.
• The rate that applies to the top slice of your income is your tax bracket.

### A simplified example of brackets

For a simple example of how progressive taxation works, say the government has three marginal rates, set up like this:

• 10%: \$0 to \$20,000
• 20%: \$20,001 to \$50,000
• 30%: \$50,001 and above

Now, let's say your taxable income is \$75,000. This would put you in the 30% bracket.

• The first \$20,000 of that would be taxed at 10%, or \$2,000.
• The next \$30,000 would be taxed at 20%, or \$6,000.
• The final \$25,000 of your income would be taxed at 30%, or \$7,500.
• Your total tax would be: \$2,000 + \$6,000 + \$7,500 = \$15,500.

In this scenario, even though you're in the 30% bracket, you would actually pay only about 20.7% of your income in taxes.

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### Taxable income is what matters

For example, in 2020, let's say a married couple files jointly with a combined total income of \$80,400. They take the 2020 standard deduction amount of \$24,800 and each spouse takes a \$5,500 IRA deduction.

• \$5,500 + \$5,500 + \$24,800 = \$35,800 deductions
• \$80,800 total income - \$35,800 deductions = \$45,000 taxable income

These deductions could reduce their taxable income by \$35,800 and help drop the family into a lower tax bracket.