Tax
How To Calculate Income Tax
Income tax is progressive: each slice of income is taxed at its own rate, so the whole amount is never taxed at the top rate. The effective rate is what you actually pay; the marginal rate is what the next dollar costs.
Quick Answer
Tax = sum of each bracket amount x its rate; Effective rate = tax / income
- income
- Taxable income after deductions
- bracket
- The slice of income taxed at one rate
- effective
- Total tax divided by income
- marginal
- Rate on the last dollar earned
Split taxable income into bracket slices, tax each at its own rate, and add them up. The effective rate is the total tax divided by income, while the marginal rate is the bracket the last dollar falls in. On 75,000 of taxable income, a single filer owes about 11,553, an effective rate of 15.4 percent and a marginal rate of 22 percent.
What Is Income Tax?
Income tax is the tax a government levies on earnings, and in most systems it is progressive, meaning the rate rises as income rises. The critical feature is that the higher rates apply only to the income above each threshold, not to the whole amount.
A bracket is a band of income taxed at a single rate. If the first band runs to 11,600 at 10 percent, a filer with 20,000 pays 10 percent on the first 11,600 and the next rate on the remaining 8,400. Only the income inside each band faces that band's rate.
The marginal rate is the rate on the last dollar earned, and it is the rate that applies to any additional income. It is the number to use when deciding whether to take on extra work or make a deductible contribution, because it prices the next dollar.
The effective rate is the total tax divided by total income. It is always lower than the marginal rate for a progressive system, because the lower brackets pull the average down. A filer with a 22 percent marginal rate typically has an effective rate in the mid teens.
Taxable income is not the same as gross income. Deductions reduce gross income to the taxable figure, and credits then reduce the tax itself rather than the income. A deduction is worth the marginal rate multiplied by the amount; a credit is worth its face value.
The difference between a deduction and a credit matters. A 1,000 deduction saves the marginal rate times 1,000, while a 1,000 credit saves the full 1,000. Credits are more valuable at low marginal rates and are the ones to prioritise.
The standard deduction is a fixed amount that most filers subtract before applying the brackets, and it means the first slice of income is untaxed. Itemising instead allows specific expenses, and it only pays if the total exceeds the standard amount.
The brackets are indexed to inflation, so the thresholds rise over time and prevent bracket creep from silently raising taxes. The rates themselves change only when the law changes.
Marginal rates are the basis for many planning decisions. Contributing to a retirement account at a 22 percent marginal rate defers tax at 22 percent, and a withdrawal later at a lower rate turns the difference into a saving.
Filing status changes the brackets. A married couple filing jointly has wider bands than a single filer, so the same income faces lower rates. The calculator here uses single-filer brackets.
Payroll taxes are separate from income tax. Social Security and Medicare contributions are withheld on wages in addition to income tax, and they have their own thresholds and rates.
State income tax, where it exists, is levied on top of federal tax, with its own brackets and rates. The federal figure is only part of the total bill, so a complete estimate needs the state layer too.
The calculator applies a simplified bracket structure to taxable income and reports the tax, the effective rate, the marginal rate and the after-tax income. It ignores credits, state tax and payroll tax, so treat it as a baseline rather than a final figure.
Formula
Tax = 0.10 x b1 + 0.12 x b2 + 0.22 x b3 + ...
Each bracket slice multiplied by its own rate and summed.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| r | Bracket rate | percent | Rate applied to that band. |
| b | Bracket amount | currency | Income falling inside that band. |
Effective rate = total tax / taxable income x 100
The average rate paid across all income.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| T | Total tax | currency | Tax across all brackets. |
| I | Taxable income | currency | Income after deductions. |
How To Calculate Income Tax
- 1
Start from taxable income
Use income after deductions, not gross pay. The standard deduction already removes a slice before the brackets apply.
- 2
Split income into brackets
Work out how much of the income falls in each band. Only the amount inside a band is taxed at that band's rate.
- 3
Tax each band at its rate
Multiply each band amount by its rate and add the results. This is the total tax before credits.
- 4
Compute the effective rate
Divide the total tax by taxable income and multiply by 100. It will be lower than the marginal rate.
- 5
Identify the marginal rate
The marginal rate is the band the last dollar falls in. It is the rate that applies to any additional income or deduction.
Examples
Example 1: 75,000 of taxable income, single filer
- Taxable income
- 75,000
| Step | Calculation | Result |
|---|---|---|
| First bracket at 10% | 11,600 x 0.10 | 1,160 |
| Second bracket at 12% | 35,550 x 0.12 | 4,266 |
| Third bracket at 22% | 27,850 x 0.22 | 6,127 |
| Total federal tax | 1,160 + 4,266 + 6,127 | 11,553 |
| Effective rate | 11,553 / 75,000 x 100 | 15.404 |
Result: The federal tax is 11,553, an effective rate of 15.404 percent and a marginal rate of 22 percent, leaving 63,447 of after-tax income.
Example 2: 40,000 of taxable income, single filer
- Taxable income
- 40,000
| Step | Calculation | Result |
|---|---|---|
| First bracket at 10% | 11,600 x 0.10 | 1,160 |
| Second bracket at 12% | 28,400 x 0.12 | 3,408 |
| Total federal tax | 1,160 + 3,408 | 4,568 |
| Effective rate | 4,568 / 40,000 x 100 | 11.42 |
| Marginal rate | the 12% band | 12 |
Result: At 40,000 the tax is 4,568, an effective rate of 11.42 percent, with a marginal rate of 12 percent because the last dollar sits in the second bracket.
Calculator
Estimated federal tax
$11,553.00
- Effective rate
- 1540.40%
- After-tax income
- $63,447.00
- Marginal rate
- 2200.00%
Values update as you type. This calculator covers the single scenario its formula assumes — see Common Mistakes for what it leaves out.
Prefer a full-width tool? Open the Income Tax calculator page.
Common Mistakes
Taxing the whole income at the top rate
Only the income inside each bracket is taxed at that rate. Applying the marginal rate to the whole income hugely overstates the tax.
Confusing marginal and effective rates
The marginal rate prices the next dollar; the effective rate is the average paid. Using one when the other is meant leads to poor decisions.
Ignoring the standard deduction
The first slice of income is untaxed because of the standard deduction. Working from gross income rather than taxable income overstates the bill.
Treating a deduction like a credit
A deduction saves the marginal rate times the amount; a credit saves its full face value. They are not interchangeable.
Forgetting state and payroll taxes
Federal income tax is only part of the bill. State income tax and payroll taxes add to the total, so a full estimate includes them.
Assuming a raise is not worth it
A higher marginal rate applies only to the extra income, never to the whole salary. A raise always increases take-home pay.
Using last year's brackets
Brackets are indexed to inflation and can change with the law. Using outdated thresholds misstates the tax.
FAQ
How is federal income tax calculated?
Taxable income is split into bracket slices, each taxed at its own rate, and the results are added. On 75,000 a single filer owes about 11,553.
What is the difference between marginal and effective rate?
The marginal rate is the rate on the last dollar earned; the effective rate is total tax divided by income. The effective rate is always lower in a progressive system.
Does a raise ever reduce my take-home pay?
No. Higher rates apply only to the income in the higher bracket, so additional income always increases after-tax pay.
What is the difference between a deduction and a credit?
A deduction reduces taxable income and saves the marginal rate times the amount. A credit reduces the tax itself and saves its full value.
Are these the current brackets?
The calculator uses a fixed bracket structure for illustration. Brackets are indexed to inflation and can change, so check the current figures for your filing year.
Does this include state tax?
No. It estimates federal income tax only. State income tax and payroll taxes are separate and should be added for a full picture.
References
- [1]Internal Revenue Service, Federal income tax brackets — https://www.irs.gov/filing/federal-income-tax-rates-and-brackets
- [2]Investopedia, How tax brackets work — https://www.investopedia.com/terms/t/taxbracket.asp
- [3]USA.gov, Taxes — https://www.usa.gov/taxes