Rate schedule (federal income tax)
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A rate schedule is a chart that helps
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taxpayers determine their federal income tax for a particular year.Samuel A. Donaldson, ''Federal Income Taxation of Individuals: Cases, Problems and Materials'', 2nd Edition (St. Paul: Thomson/West, 2007), 8-9.Internal Revenue Service, United States Department of the Treasury, "2007 Federal Tax Rate Schedules," https://www.irs.gov/pub/irs-prior/i1040tt--2007.pdf. Another name for "rate schedule" is "rate table".


Origin

The origin of the current rate schedules is the
Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 ...
of 1986 (IRC), which is separately published as Title 26 of the
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. With that law, the
U.S. Congress The United States Congress is the legislature of the federal government of the United States. It is Bicameralism, bicameral, composed of a lower body, the United States House of Representatives, House of Representatives, and an upper body, ...
created four types of rate tables, all of which are based on a taxpayer's filing status (e.g., "married individuals filing joint returns," "heads of households"). Each year the United States
Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service for the Federal government of the United States, United States federal government, which is responsible for collecting Taxation in the United States, U.S. federal taxes and administerin ...
(IRS) updates rate schedules in accordance with guidelines that Congress established in the IRC. In general, the IRS bases such adjustments on
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
and
cost of living Cost of living is the cost of maintaining a certain standard of living Standard of living is the level of income, comforts and services available, generally applied to a society or location, rather than to an individual. Standard of living ...
increases in the previous year.


Application

The tax rate schedules give tax rates for given levels of
taxable income Taxable income refers to the base upon which an income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed ...
. There is a complex relationship between taxable income and actual income, making it difficult to draw conclusions from the tables. Even the marginal tax rates are misleading because there are various laws that relate taxable income to actual income such that an increase of a dollar of actual income results in an increase of more or less than a dollar in taxable income depending on the circumstances surrounding the increase, thus making the marginal tax rate dependent on an individual taxpayer's personal situation. These schedules apply only to regular US income tax, whereas there is a second income tax, the Alternative Minimum Tax, that uses a different schedule. A taxpayer's tax obligation is the higher of those two income taxes, which makes drawing conclusions from the table even more difficult.


Format

All rate schedules have an identical format, containing four columns and seven rows (called "brackets"). The first two columns indicate the range of taxable income that a taxpayer must have to qualify for a particular tax rate. The third column indicates the tax rate itself. The fourth column gives the range of income to which the current marginal rate applies. Given that Congress has prescribed a system of progressive taxation, all but the lowest-earning taxpayers pay distinct rates for different parts of their income. The following are the IRS rate schedules for 2021: Schedule X — Single Schedule Y-1 — Married filing jointly or qualifying widow(er) Schedule Y-2 — Married filing separately Schedule Z — Head of household Caution: These tables shown above are accurate for 2021 only and do not apply for any other year.


Use of rate schedules

To use a rate schedule, a taxpayer must know their filing status and amount of taxable income. Definitions related to one's filing status can be found in IRC § A.2(a-b), and general guidelines regarding taxable income are described in IRC § A.63(a-b).26 U.S.C. §§ A.2(a-b), 63(a-b); Samuel A. Donaldson, ''Federal Income Taxation of Individuals: Cases, Problems and Materials'', 2nd Edition (St. Paul: Thomson/West, 2007), 5-6, 26-27. Once a taxpayer has made these determinations, he (1) references the pertinent rate schedule, (2) finds the appropriate bracket (based on her taxable income), and (3) uses the formula described in the third column to determine his federal income tax. Assume, for example, that Taxpayer A is single and has a taxable income of $175,000 in 2021. The following steps apply the procedure outlined above:
(1) Because he is single, the pertinent rate table is Schedule X.
(2) Given that his income falls between $164,296 and $209,425, he uses the fifth bracket in Schedule X.
(3) His federal income tax will be "$33,602.42 plus 32% of the amount over $164,295." Applying this formula to Taxpayer A, one arrives at the following result:
$33,602.42 + (0.32 * ($175,000 - $164,295)) =
$33,602.42 + (0.28 * https://en.wikipedia.org/wiki/Standard_deduction$85,650) =
$33,602.42 + $3,425.60 = $37,028.02.
Accordingly, Taxpayer A must pay $37,028.02 in federal income taxes for 2021. Since his income is in the fifth bracket, his marginal tax rate for each additional dollar he earns is 32%, but his effective tax rate is 21% ($37,028.02/$175,000 is .212).


See also

*
Income tax in the United States Income taxes in the United States are imposed by the Federal government of the United States, federal government, and most State governments in the United States, states. The income taxes are determined by applying a tax rate, which Progressive ...
* Progressivity in United States income tax *
Standard deduction Under United States tax law, the standard deduction is a dollar amount that non-Itemized deduction, itemizers may subtract from their income before Income tax in the United States, income tax (but not other kinds of tax, such as payroll tax) is a ...
General: * Tax bracket


References

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