How tax brackets work [2025 Tax Brackets]

Understanding how your income is taxed and how the tax brackets work will help your tax planning and tax negotiations. Now, with inflation back in the normal range, let’s take a look at the new tax brackets and see how you can plan better for the new year.

Here’s what to know as 2025 ends and a new year is set to begin.

Tax tags in 2026

https://www.youtube.com/watch?v=wkodeosoasz

Here are the tax brackets for 2025, according to the IRS and the Tax Foundation, with taxes due in April 2026.

Here’s how the tax brackets will change for the 2026 tax year, according to the IRS, which will be paid in April 2027.

The general reduction has been revived in 2026, even after the mid-year adjustment made by 2025. Here is what OBBBA’s previous standard deduction was in 2025:

• One: $15,000
• Joint transplant: $30,000
• Head of household: $23,500

Here’s what 2025 was like after Obbba passed:

• One: $15,750
• Joint transplant: $31,500
• Head of household: $23,625

Here’s what the standard deduction will be in 2026 (applied in April 2027):

• One: $16,100
• Joint transplant: $32,200
• Head of household: $24,150

From 2022 to 2023, there was a large increase in the standard deduction, due to inflation. However, over the past three years, this increase has been modest, similar to how much retiree contribution limits have increased.

People don’t understand how tax brackets work

One of the most interesting things I’ve seen over the years is that most people don’t really understand how the tax brackets work, and they overestimate how much they pay in taxes. For example, I did a few twitter polls a few years ago discussing tax brackets. Check out:

Remember, these are not opinion questions.

These questions actually have correct answers that can be easily calculated and, frankly, given how different the answers are from one another, they are easily estimated. It’s like asking, “Is China closer to Vietnam, Switzerland, Cuba, or Tonga?” However, only 27%-30% of people got the answers right. Randomly good chance would allow 25% of them to get it right. But what is more interesting is that 61%-73% of the respondents had initiated the tax burden.

Why people don’t get tax brackets

There are several reasons why people are able to answer those questions well. I think I know why.

#1 People don’t understand the difference between marginal tax rates and effective tax rates

Remember that your marginal tax rate, or tax bracket, is the rate at which your next dollar earned will be taxed. Your effective tax rate is the amount you pay divided by your gross income. Your effective tax rate is always less than your Marginal tax rate. Perhaps this is best illustrated by showing how you come up with the correct answer to a question.

If a married couple earns $100,000 in 2025 (with taxes due in April 2026) and takes no deductions other than the standard deduction, how much income tax will they pay?

First, they take out the standard deduction of $31,500. That leaves $68,500. The first $23,850 is taxed at 10%, yielding $2,385 in taxes. That leaves $68,500 – $23,850 = $44,650. That’s $44,650 all of which falls within the 12% tax bracket, so everything is taxed at 12%. $44,650 x 12% = $5,358. $2,385 + $5,358 = $7,743. $ 7,743/- $ 100,000 = 7.74%.

There are two main points here. The first is that there is a 0% bracket. Some of your income is not taxed at all. That would be a standard deduction. It might be some reduction. There may be other higher reductions. Anything else. But whatever you get as a deduction is not taxed at all. It’s in the “0% bracket.” Some critics on Twitter are starting to get addicted to all these reductions that can be taken. However, all of them would reduce the relevant tax. This is, in fact, the maximum tax paid on that salary, not the minimum. So, most people were still crying for a fair tax, even though I used a very high tax in this case.

Second, just because it’s in the 12% bracket doesn’t mean you’re paying 12% tax. You only pay tax on the money in that bracket. You fill in the brackets as you go. Otherwise, you would have paid $12,000 in taxes instead of $7,743. If you know that someone makes $100,000 at 12%, you should know that the answer to the question must be less than 12%. There is no reason to guess a higher number than that.

More details here:

You should do your taxes at least once – here’s how I do it

Investment tax

# 2 People don’t understand the difference between taxes withheld and taxes paid

Most people are workers. They don’t actually report how much tax they owe, and they don’t send it to the IRS each quarter like business owners do. It is simply taken out of its employer before receiving it. The new withholding tables are more accurate than the older ones, but most workers have already paid more than they actually owe. That’s why they get this big refund every spring. That’s another thing I get – how happy people who are genuinely happy with loans are interested in their government. But I think it contributes to the idea that people think they pay more in taxes than they do.

# 3 People don’t know what income tax is

There are also many people who do not know the difference between all the taxes we pay. Don’t get me wrong: there are many taxes. There is local and local income tax. There are taxes paid such as social security tax, Medicare tax, one of two types of Medicare and Affordable Care Tax (PPACA), and unemployment tax. There is sales tax and excise tax and gas tax and estate tax and inheritance tax. I guess it’s no surprise that people can’t tell them themselves. Many of these are withheld from their paychecks (state and local taxes as well as taxes paid such as social security taxes, Medicare taxes, and one of the two PPACA tents). In fact, some of those tax payers (and some PPACA tax) even show up on their federal income tax returns, and confuse the situation.

Most people pay more than 7.74% of $100,000 in income tax but not in income tax. Federal income tax is very progressive (44% of people pay no income tax at all, while others have marginal tax rates as high as 37%). However, there are other taxes that can improve. My Utah income tax is a flat tax, at least once you get past the deduction. The Medicare tax is a flat tax of 2.9% on all income, half from the employer and half from the employee. The Social Security tax is also a flat 12.4% on all income, half from the employer and half from the employee (but it reaches a salary of $176,100 in 2025 and $183,600 in 2026). After that, it goes to 0% (at least for the employee), thus it is a tax influencing on the money above.

In any case, people may not realize that the Federal tax brackets only apply to income taxes.

More details here:

20 ways to reduce your high income tax

3 Major Tax Deductions for Physicians

# 4 people think that everything that comes out of their paycheck is tax

Worse, some people simply assume all withdrawals are out of pocket before they get taxed — including their retirement account contributions, their share of health insurance premiums, or court support. Sorry, some of those nice things have to pay, but not taxes, a tax with little use.

It is important to understand how our taxes work, especially the biggest one for most of us – income tax. Knowing how they work will help you better manage your money and actually have smarter conversations with others about government policies and tax policies.

WHAT DO YOU THINK? Why do you think most people could not answer the above questions correctly? Why is the tax code so mysterious to US citizens?

[This updated post was originally published in 2020.]