Income Tax Rates: How They Work and Are Calculated
Understand the mechanics of how your income tax is calculated. This guide explains the layered system of rates that determines your actual tax liability.
An income tax rate is the percentage at which an individual’s earnings are taxed. In the United States, this system is a method for funding federal government operations and public services. The system is designed to tax different levels of income at progressively higher rates. The specific rates and the income levels to which they apply are subject to change based on tax legislation.
Federal Income Tax Brackets
The federal tax system is structured using tax brackets. A tax bracket is a range of income taxed at a specific rate, and a taxpayer’s marginal tax rate is the rate paid on their highest dollar of income. As income rises, it moves through these brackets, with each portion of income being taxed at the corresponding rate for that bracket.
For example, a single individual does not pay 22% on all their income just because they fall into the 22% bracket. Instead, they pay 10% on the first segment of their income, 12% on the next, and 22% only on the portion of their income that falls within that specific bracket. The income thresholds for these brackets are adjusted annually for inflation by the Internal Revenue Service (IRS).
The income ranges for each bracket depend on a person’s filing status, which includes Single, Married Filing Jointly, Married Filing Separately, and Head of Household. For tax year 2025, the IRS has established seven tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These rates are scheduled to revert to previous, higher levels in 2026 if current laws are not extended.
2025 Federal Income Tax Brackets: Single
- 10% on income up to $11,925
- 12% on income over $11,925 to $48,475
- 22% on income over $48,475 to $103,350
- 24% on income over $103,350 to $197,300
- 32% on income over $197,300 to $250,525
- 35% on income over $250,525 to $626,350
- 37% on income over $626,350
2025 Federal Income Tax Brackets: Married Filing Jointly
- 10% on income up to $23,850
- 12% on income over $23,850 to $96,950
- 22% on income over $96,950 to $206,700
- 24% on income over $206,700 to $394,600
- 32% on income over $394,600 to $501,050
- 35% on income over $501,050 to $751,600
- 37% on income over $751,600
2025 Federal Income Tax Brackets: Married Filing Separately
- 10% on income up to $11,925
- 12% on income over $11,925 to $48,475
- 22% on income over $48,475 to $103,350
- 24% on income over $103,350 to $197,300
- 32% on income over $197,300 to $250,525
- 35% on income over $250,525 to $375,800
- 37% on income over $375,800
2025 Federal Income Tax Brackets: Head of Household
- 10% on income up to $17,000
- 12% on income over $17,000 to $64,850
- 22% on income over $64,850 to $103,350
- 24% on income over $103,350 to $197,300
- 32% on income over $197,300 to $250,525
- 35% on income over $250,525 to $626,350
- 37% on income over $626,350
To illustrate how this works, consider a single filer with a taxable income of $90,000 in 2025. The tax is calculated in pieces: 10% on the first $11,925 ($1,192.50), plus 12% on the income between $11,926 and $48,475 ($4,386), plus 22% on the remaining income from $48,476 to $90,000 ($9,135.30). The total federal income tax would be the sum of these amounts, totaling $14,713.80.
Calculating Your Effective Tax Rate
While the marginal tax rate shows the tax on your highest dollar of income, the effective tax rate provides a more comprehensive view of your tax burden. The effective tax rate is the average rate at which your income is taxed and is calculated by dividing your total tax liability by your taxable income.
The calculation begins with Gross Income, which includes all income from sources not explicitly exempt from tax, such as wages, salaries, bonuses, and investment income. From gross income, certain “above-the-line” adjustments are subtracted to arrive at Adjusted Gross Income (AGI). These adjustments can include contributions to a traditional IRA, student loan interest payments, and certain self-employment expenses.
Taxable Income is calculated by subtracting either the standard deduction or itemized deductions from your AGI. The standard deduction is a fixed dollar amount that varies by filing status, age, and whether the taxpayer or their spouse is blind. For 2025, the standard deduction is $15,000 for single filers, $30,000 for married couples filing jointly, and $22,500 for heads of household.
A taxpayer can choose to itemize deductions if the total of their specific deductible expenses exceeds their standard deduction amount. Common itemized deductions include mortgage interest on up to $750,000 of principal, state and local taxes up to $10,000, and medical expenses that exceed 7.5% of AGI.
The final step involves tax credits, which are different from deductions. While deductions reduce your taxable income, credits reduce your final tax bill on a dollar-for-dollar basis. For instance, a single filer with a gross income of $85,000 contributes $5,000 to a traditional IRA, for an AGI of $80,000. Taking the $15,000 standard deduction leaves a taxable income of $65,000, resulting in a tax liability of $9,388. A $1,000 tax credit would reduce their final tax to $8,388, making their effective tax rate approximately 12.9% ($8,388 divided by $65,000).
State and Local Income Tax Rates
Most states and some local governments levy their own income taxes to fund services like education and transportation. Currently, 41 states and the District of Columbia impose a personal income tax. Nine states do not have a broad-based individual income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire’s tax on interest and dividend income was fully repealed as of January 1, 2025.
States that levy an income tax use one of two systems: progressive or flat rate. The majority of states use a progressive tax structure similar to the federal system. The number of brackets and the specific rates vary significantly from one state to another.
A number of states have adopted a flat tax system, where a single income tax rate is applied to all income levels. States with a flat tax include Colorado, Illinois, Indiana, and Michigan. For example, in a state with a 4% flat tax, an individual with $50,000 in taxable income would owe $2,000, and an individual with $200,000 would owe $8,000.
Some municipalities, such as cities or counties, impose their own local income taxes. These are collected in addition to federal and state taxes and are calculated as a percentage of wages earned within the locality’s jurisdiction. The existence and rate of these local taxes can vary widely even within the same state.
Tax Rates for Different Types of Income
Not all income is subject to the same federal tax rates. The tax treatment of income depends on its source and character, distinguishing between ordinary income and certain types of investment income.
Most sources of income, including wages, salaries, tips, bonuses, and interest from bank accounts, are classified as ordinary income. This income is taxed according to the federal income tax brackets.
In contrast, certain investment income receives preferential tax treatment. Long-term capital gains and qualified dividends are taxed at lower rates than ordinary income. A long-term capital gain is the profit from selling an asset, like stocks or real estate, that has been held for more than one year. Qualified dividends are payments from corporations to shareholders that meet specific IRS criteria, including holding period requirements.
For 2025, the tax rates for long-term capital gains and qualified dividends are 0%, 15%, or 20%, depending on the taxpayer’s total taxable income.
0% Rate: Applies to single filers with taxable income up to $48,350, married couples filing jointly with income up to $96,700, and heads of household with income up to $64,750.
15% Rate: Applies to single filers with taxable income over $48,350 up to $533,400, married couples filing jointly with income over $96,700 up to $600,050, and heads of household with income over $64,750 up to $566,700.
20% Rate: Applies to taxpayers with income exceeding the 15% rate thresholds.
Short-term capital gains, which are profits from assets held for one year or less, do not receive this favorable treatment. They are taxed as ordinary income at the taxpayer’s regular marginal tax rate.