UK Accounting Glossary
A tax bracket is the rate of income tax an individual must pay if their income falls within a specific income range. The progressive tax<tax rate used in the United States tax system creates the need for a tax bracket to be assigned to a particular yearly income range. A progressive tax bracket is designed so that those who make less income are taxed at a lower percentage than those who have a higher income. Tax rates and the accompanying tax bracket for specific income changes from time to time as new tax laws are enacted. However, to better understand the purpose of a tax bracket consider this illustrative example. An individual with a yearly income of $65,000 would fall into the 25 percent tax bracket. This tax bracket includes incomes from $34,001 to $82,400. Taxes for this individual would be calculated using the rates for each tax bracket that it passes through. The first $8,375 will be taxed at 10 percent (0-$8,375 tax bracket). The next $25,625 will be taxed at 15 percent ($8,376-$34,000 tax bracket). Finally, the remaining income of $31,000 ($65,000 – $34,000) will be taxed according to the 25 percent tax bracket.
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This glossary post was last updated: 5th February 2020.