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How do tax brackets affect the amount of tax I owe?

Tax planning is not only a necessity, it’s also a great way to save money. Knowing how tax brackets affect the amount of tax you owe can be a valuable tool in your financial planning strategy.

At Creative Advising, we believe that understanding how tax brackets work is essential for making the most of your money. We have a team of certified public accountants, tax strategists and professional bookkeepers who are committed to helping you understand the ins and outs of tax brackets and how they affect your tax burden.

In this article, we will explain how tax brackets work and how they can affect the amount of tax you owe. We will also provide tips on how you can use tax brackets to your advantage to minimize your tax liability.

By understanding how tax brackets work and how they can affect the amount of tax you owe, you can make more informed decisions about your financial strategy. With the help of our team of professionals at Creative Advising, you can be sure that you are taking advantage of all the tax benefits available to you.

So, if you want to learn more about how tax brackets affect the amount of tax you owe, read on!

Marginal Tax Rates

Marginal tax rates are the rates at which you are taxed on your last dollar of income earned. Tom Wheelwright, a CPA and Advanced Tax and Wealth Strategist, explains, “Your top marginal tax rate is based on the amount of taxable income you earn. The higher your taxable income, the higher your marginal tax rate will be. Your marginal tax rate determines what you will pay on the last dollar of income you earn before it moves you into the next tax bracket. This is why it is called a ‘marginal’ tax rate. It is the rate on the margin as you move through the different levels of taxable income.”

As an example, let’s say your taxable income is $50,000. This would place you in the 22% tax bracket, meaning you would pay 22% on the last dollar you earn as you move into the 24% tax bracket. It is important to note, however, that taxpayers do not pay this rate on all of their income. This rate only applies to that last dollar. All the other dollars are taxed at the rates associated with the tax brackets below this one.

So, how do marginal tax rates affect the amount of tax you owe? They play a large role in determining the amount of tax you owe because they determine how much of your income is taxed at a specific rate. Depending on where your taxable income falls within the different tax brackets, your marginal tax rate could mean a big difference in your tax amount. It’s important to understand the marginal tax rates associated with each tax bracket and how it could affect your tax burden.

Tax Bracket Thresholds

Understanding tax bracket thresholds is key to understanding marginal tax rates. Tax bracket thresholds are predetermined income levels at which a person’s tax rate is increased or decreased. Tax bracket thresholds are determined by the government and differ depending on a person’s filing status (e.g. single, married filing jointly). This means that an individual or family’s economic level affects the tax rate applied to the taxable income. As taxable income increases, different tax brackets are entered, and the rate of taxation increases.

Let’s look at the federal tax brackets for single filers as of 2020:

– 10% on the first $9,875 of taxable income
– 12% on taxable income between $9,876 and $40,125
– 22% on taxable income between $40,126 and $85,525
– 24% on taxable income between $85,526 and $163,300
– 32% on taxable income between $163,301 and $207,350
– 35% on taxable income between $207,351 and $526,250
– 37% on taxable income over $526,250

The U.S. Tax Code is progressive, meaning as your income increases, so do your taxes. This means that someone earning $50,000 would pay a different rate compared to someone earning $80,000. The rate also depends on the filing status – the brackets can be different for people filing jointly compared to those filing as single, head of household, or qualifying widow(er).

How do tax brackets affect the amount of tax I owe? Due to the progressive tax structure, as your income increases, more of that income is taxed at higher brackets. This can cause the tax bill to increase faster than the rate of wage growth. For example, someone filing as single making $100,000 would pay $30,600 in taxes or about 30% of their total earnings, while someone filing as single making $200,000 would pay $56,400 in taxes or 28% of their total earnings. However, it’s important to take into consideration the deductions, credits, and other items that may reduce your taxable income and limit the tax you owe.

Tax Credits

Tax Credits are forms of incentives that are given to taxpayers in order to reduce the amount of tax payable on their taxable income. Tax credits are different from deductions because a tax credit is an amount of money you subtract from your total taxes owed, whereas a deduction is an amount of money you subtract from you total taxable income, resulting in a lower amount of total taxes owed. Tax credits are specific amounts of money that apply to particular types of income, such as the earned income credit or child tax credit.

Tax credits are particularly beneficial for taxpayers because they result in a direct reduction in the amount of taxes owed. This is different from deductions which can indirectly reduce the amount of taxes owed if they lower total taxable income. Tax credits can be used to offset the amount of taxes owed, meaning that a taxpayer can reduce the amount of taxes paid to zero or even receive money (refundable credits) from the government.

When it comes to tax brackets, tax credits can effectively lower a taxpayer’s income to a lower tax bracket, resulting in a decrease in the amount of taxes paid. This is because tax credits are subtracted directly from the total taxes owed, which means they can lower the amount of taxes owed without changing the taxpayer’s total taxable income. For example, if a taxpayer falls into the 35% tax bracket, but qualifies for a $1,000 tax credit, they will only owe 25% of the original tax owed, which is effectively the same as being in the 25% tax bracket.


Deductions are one of the most powerful tools when it comes to reducing your tax bill. Deductions allow taxpayers to reduce their taxable income so that they can pay less in taxes. It is important to understand how deductions work and how they can affect the amount of taxes that you owe.

The first step to understanding deductions is to understand your marginal tax rate, and your tax bracket thresholds. A marginal tax rate is the amount of taxes you owe on the last dollar you make. The higher your marginal tax rate, the more taxes you pay as you progress up the income scale.

Tax brackets divide income levels into goals, and the more income you make, the higher tax bracket you go into. To give an example, if you make $50,000 a year, this puts you into the 25% marginal tax rate. If you make more than $50,000, then you are into the next tax bracket, which would be the 28% marginal tax rate.

By understanding the marginal tax rate and the tax bracket thresholds, you can then start taking advantage of deductions. These deductions reduce the amount of taxable income, which can have a huge impact when it comes to the amount of tax you owe.

For example, if you make $50,000 a year and are in the 25% marginal tax rate, you will owe a certain amount of taxes on this income. However, if you were to take full advantage of all of the deductions available to you, you could reduce your taxable income to $35,000, which would put you in the currently 15% marginal tax rate. This could save you thousands of dollars in taxes.

Deductions are a great tool when it comes to reducing your tax bill, and it is important to understand how deductions work in relation to your marginal tax rate and tax bracket thresholds. Here at Creative Advising, we can help you understand and maximize your deductions so that you can get the most out of your tax return.

Taxable Income

Taxable income is the overall money earned or received by an individual after all taxable deductions or exemptions are taken into account. It is the amount on which the taxes are calculated. Knowing your taxable income is an essential part of planning your financial and tax considerations.

Tom Wheelwright, CPA and Tax Strategist, says that the amount of tax you owe is impacted by your individual tax bracket. Tax brackets are the range of income in which taxes are calculated at a certain rate; as you make more money, you move into a higher tax bracket and the percentage you owe as taxes increases. The relevance of the tax bracket is clear, as it directly affects the amount of taxes you must pay on your taxable income. It’s important to be aware of the rules and regulations of the different tax brackets and any changes that may occur.

For example, if you are in a 15% tax bracket and you make $100,000, you would only owe taxes on the income earned above the 15% threshold (which is based on a range of taxable income amounts). Although you will be taxed on the full $100,000 amount, the amount of tax owed is going to be calculated at a rate lower than 15% due to other influencing factors such as deductions, credits, etc.

Ultimately, identify your taxable income, understand the differences between the different tax brackets, and explore tax strategies that will help you reduce your tax burden and optimize your financial situation.

“The information provided in this article should not be considered as professional tax advice. It is intended for informational purposes only and should not be relied upon as a substitute for consulting with a qualified tax professional or conducting thorough research on the latest tax laws and regulations applicable to your specific circumstances.
Furthermore, due to the dynamic nature of tax-related topics, the information presented in this article may not reflect the most current tax laws, rulings, or interpretations. It is always recommended to verify any tax-related information with official government sources or seek advice from a qualified tax professional before making any decisions or taking action.
The author, publisher, and AI model provider do not assume any responsibility or liability for the accuracy, completeness, or reliability of the information contained in this article. By reading this article, you acknowledge that any reliance on the information provided is at your own risk, and you agree to hold the author, publisher, and AI model provider harmless from any damages or losses resulting from the use of this information.
Please consult with a qualified tax professional or relevant authorities for specific advice tailored to your individual circumstances and to ensure compliance with the most current tax laws and regulations in your jurisdiction.”