How do tax brackets work per paycheck?

The tax brackets show you the tax rate you'll pay for each portion of your income. Then, the next portion of your income is taxed at 12%, and so on, up to the top of your taxable income. Several provisions of the tax code, including the income thresholds that report federal tax categories, are adjusted annually to reflect the rate of inflation. You can reduce your income to another tax bracket through tax deductions, such as canceling charitable donations, property taxes, and mortgage interest.

The government decides the amount of taxes it owes by dividing its taxable income into parts, also known as tax brackets, and each part is taxed at the corresponding tax rate. Low income is included in tax categories with relatively low tax rates, while higher earnings are included in brackets with higher rates. In addition, tax categories have an automatic stabilizing effect on a person's after-tax income, since a decline in funding is offset by a decrease in the tax rate, leaving the person with a less substantial decline. In 1981, Reagan's first tax cut further reduced the maximum rate to 50 percent, and the 1986 tax reform reduced it to 28 percent.

Different tax rates are imposed on income in different ranges (or brackets) depending on the taxpayer's marital tax status. Tax brackets result in a progressive tax system, in which taxes increase progressively as a person's income increases. The progressive tax system means that people with higher taxable incomes are subject to higher federal tax rates, and people with lower taxable income are subject to lower federal tax rates. In other words, taxpayers will pay the lowest tax rate in the first “tranche” or level of taxable income, a higher rate at the next level, and so on.

Tax credits can lower your tax bill dollar-for-dollar; they don't affect what category you're in. The four original reporting states were single, married filing jointly, married filing separately, and head of household, although the rates were the same regardless of tax status. Most taxpayers, except those who fall directly into the minimum category, have income that is progressively taxed, meaning that their income is subject to multiple rates beyond the nominal rate of their tax bracket. The tax brackets and the progressive tax system they create contrast with a flat tax structure, in which all people pay taxes at the same rate, regardless of their income levels.

In the United States, the Internal Revenue Service (IRS) uses a progressive tax system, which means that it uses a marginal tax rate, which is the tax rate paid on an additional dollar of income.