Tax Basics

tax brackets

Taxes, Basketball, and Bracketology | 2016 Tax Brackets

March 25, 2017 : Gil Charney

This is March, when you hear the word “bracket,” what comes to mind first? If it’s the NCAA tournament, you are not alone. But this is also tax filing season, and many of us are also thinking about our own tax bracket. All it takes is $1 of income to bust your bracket – but that doesn’t mean you lose the whole game!

With the NCAA’s tournament – the “Big Dance” – you lose one game and you’re out (which could also be said for your bracket). When it comes to taxes, though, only your marginal income determines which bracket you’re in. For example, if you’re a single taxpayer, and your taxable income (not just your salary or wages!) is $60,000, you are practically at center court in the 25% tax bracket. This means that every additional (marginal) dollar of taxable ordinary income is taxed at 25%.

To clarify what this means, it helps to know how your tax liability is determined. In the basketball tournament, it doesn’t matter what the score is – you either advance to the next bracket, or you’re out. The federal tax bracket system keeps you in the game – you just have to pay a little more when you advance.

The Current Federal Income Tax System

The federal individual income tax system is currently progressive, meaning that as your income rises, the tax rate associated with that additional income might also rise if the additional income moves you into the next bracket.

So, if you’re a single taxpayer with taxable income of $60,000, you’re in the 25% bracket. You’ll reach the 28% bracket if your taxable income exceeds $91,150 (in 2016). As you move up in income, the rate of tax on the next dollar of income is the same until you reach the next bracket.

It’s important to note that not all of your income gets taxed at that higher rate – only your marginal, or additional income. Your taxable income is stacked, layer upon layer, at each rate in the progression of tax brackets, as shown in the chart. Let’s take a 60-second walk down the court to check this out.

For example, suppose you are a single taxpayer with taxable ordinary income of $60,000. Your total federal income tax is $10,772. Your tax software, tax preparer, or tax table might produce a slightly different result within a dollar or two, but if you calculated your tax by hand, how is this number calculated?

Let’s start by taking a look at the tax brackets. Here are the 2016 tax brackets for a single taxpayer (See Pub. 17, Schedule X, page 267):

2016 tax brackets

Sweet 16

The first bracket of taxable income – let’s call this the Sweet 16 – is taxed at 10%. Of your $60,000 taxable income, $9,275 is taxed at 10%, resulting in $928 in taxes, rounding in dollars ($9,275 × 10%). The rest of your income keeps advancing to higher brackets.

Elite 8

The next bracket – let’s call this one the Elite 8 – is taxed at 15%. Of the $50,725 you had left after advancing from the Sweet 16, $28,375 ($37,650 – $9,275) is taxed at 15%. (Because $9,275 was already taxed at the Sweet 16’s 10%, we remove it from this bracket because we don’t want to double-tax it.) The Elite 8’s tax is $4,256 ($28,375 × 15%).

After making it through the Sweet 16 and the Elite 8, $22,350 of taxable income has advanced to the Final 4 ($60,000 – $9,275 – $28,375). The Final 4 bracket rate is now 25%, leaving a bracket tax of $5,587.50 ($22,350 × 25%).

Let’s recap how your $60,000 of taxable income fares in this tax tourney (tax is shown in parentheses):

Screen Shot 2017-03-24 at 2.39.58 PM

Final 4

So, your marginal tax is the 25% tax bracket (you made the Final 4!), because your very next dollar of taxable income will be taxed at 25%. And you will remain in this bracket until you reach $91,150 of taxable income, at which point you will have “graduated” to the 28% tax bracket (this is, after all, a graduated income tax!). By the way, your average tax rate (also called the effective tax rate) is calculated as your total tax divided by taxable income. In this case, $10,772 ÷ $60,000, or 18%.

Fortunately (or unfortunately, depending on your perspective), you don’t have any more taxable income to advance to the Championship round. But don’t worry – there’s always next year

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Gil Charney

Gil Charney

H&R Block

Gil is the Director of Tax Law and Policy Analysis for The Tax Institute at H&R Block.

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