INTRODUCING THE FEDERAL TAX BRACKETS

The first federal income tax statute stemmed from enacting the Revenue Act of 1861, which was passed by the Union government to help fund expenses related to Civil War. Then the second revenue was passed in 1862, which introduced two tax brackets: 3% for annual incomes ranging from $600 to $10,000, and 5% on incomes $10,000 and above.

The Congress repealed the income tax in 1872, until it reappeared in the 16th Amendment to the Constitution in 1913, giving the Congress the right to levy an income tax. Also, Congress imposed a 1% income tax for individuals who earn more than $3,000 a year and couples with over $4,000 income, plus a graduated surtax of 1% to 6% on incomes $20,000 and above.

As of today, the US government uses a progressive tax system where low-income taxpayers pay the lower percentage of their income and high-income ones are taxed at a higher rate. Below is the tax brackets for 2015 according to four tax statuses: single, married filing jointly, married filing separately, and head of household.

Figure 1. Marginal Tax Rates for 2015

For example, Sam, a single individual, has a taxable income of $100,000. His income falls within the 28% bracket ($90,751 - $189,300). So Sam’s income above $90,751 is taxed at the 28%. The rest will be taxed at the lower 10%, 15%, and 25%. Therefore, Sam’s total tax owed amounts to $21,071.25. How? Check the computation below (Note: the computation has not included payroll tax, state income taxes, and other deductions).

10% tax on bottom bracket – $922.50 (10% x $9,225)

15% tax on next bracket – $4,233.75 [15% x $27,825 ($37,450- $9,225)]

25% tax on next bracket – $13,325.00 [25% x $53,300 ($90,750 - $37,450)]

28% tax on highest bracket – $2,590.00 [28% x $9,250 ($100,000 - $90,750)]

Through the years, income tax act as both a political tool and a way to generate revenue for sustain successive wars and domestic needs. Tax brackets will continue to change relative to the US politics, as well as local and foreign concerns. While there is an ongoing debate whether progressive tax system should be removed or not, it is important for individuals to know how to use these rates in order to somehow plan their finances.