Understanding Tax Brackets: What You Need to Know

Tax brackets are determined by your tax marital status and taxable income. It's important to understand that your marginal tax rate or tax bracket only refers to the highest tax rate, the last tax rate to which your income is subject. A common misconception is that your marginal tax rate is the rate at which all of your income is taxed. This is not true, as Americans are often charged a rate lower than their individual federal income tax bracket, known as the effective tax rate.

Rather than analyzing what tax bracket you fall into based on your income, it's important to determine how many individual tax brackets you overlap based on your gross income. Having a rough idea of your tax bracket can help you estimate the fiscal impact of important financial decisions. Tax credits can save you more on taxes than deductions, and Americans may qualify for a variety of different credits. Education tax credits, tax credits for the cost of child care and dependent care, and tax credits for having children are just a few examples.

For every dollar you spend on a tax-deductible expense, such as mortgage interest or charity work, you could save 35 cents in federal taxes if you're in the 35% tax bracket. It's important to remember that while tax brackets won't tell you exactly how much you'll pay in taxes, they can help you assess the fiscal impact of financial decisions. Knowing this information can help you make more informed decisions about your finances and taxes.