2013 Federal Income Tax Brackets

Filing your taxes in the next couple months, for last year’s income? Find your federal income tax bracket and tax rate for income earned in 2012.

For the 2012 calendar year, the highest marginal tax rate is 35% – but a married couple filing jointly with a taxable income of $400,000, just barely in the highest bracket, would pay only 26% of their income to the federal government. The reason why is in the difference between the marginal tax rate and the effective rate. The former indicates how much your last dollar is taxed, while the latter is the percentage of your income paid in taxes.

2012 marginal tax rates (for 2013 filing season)

Sample 2012 effective tax rates for a married couple filing jointly (for 2013 filing season)

But your tax payments will probably be even lower

Imagine a married couple that earned $415,700 last year: though they are in the highest tax bracket, their tax bill will be lower than $145,495 (35% of $415,700). Rather, they’ll pay just $105,727 (26%) to the federal government. And that’s before we include any deductions – their tax bill is probably only going down from there. Because the tax rates refer not to your gross income – the amount you think of as your salary – but your taxable income, which is your gross income minus 401(k), charitable, mortgage and other deductions.

Gross income vs taxable income

Let’s take a look at another example. You’re filing singly, and your gross income last year was $40,000 – this is the income that you’d find on your offer letter.

But just because your gross income is $40,000, your last dollar earned won’t necessarily be taxed 25%, because your taxable income might be far less than $40,000 after you claim deductions, exemptions and adjustments.

For example, if you contributed $5,000 to your 401(k) in 2012, you reduce your tax liability by that same amount. These contributions are what we call tax deductible: they’re subtracted from your gross income to determine your taxable income. It’s what the federal government calls a tax adjustment, a type of tax deduction.

Your taxable income is now $35,000 ($40,000 in gross income minus $5,000 of tax-deductible retirement savings), putting you in the 15% marginal tax bracket.

If you wanted to subtract out your tax deductions – that’s mortgage interest, charitable giving, medical expenses and more – you’d keep a record of all tax-deductible expenses, add them together at the end of the year and subtract that amount from their tax liability.

But it doesn’t always make sense to deduct each expense. When you file, you can either choose to itemize your deduction – that is, subtract out your medical expenses, charitable donations and so forth – or take the standard deduction, which is the amount that anyone who doesn’t itemize gets to subtract from their gross income. The standard deduction varies by your filing status but not income, so those with higher incomes – who presumably spend more on those line-item deductions – are more likely to benefit from itemizing.

2012 standard deductions by filing status

• $5,950: Single or married filing separately
• $8,700: Head of household
• $11,900: Married filing jointly or qualified widow(er)

If you could only deduct your $5,000 401(k) deduction, you’d miss out on the standard $5,950 deduction for those filing singly. You’d be better off skipping the accounting and just taking the standard deduction. By contrast, somebody who gave $20,000 to charity and put $10,000 into her 401(k) is better off itemizing.

Marginal tax rate vs. effective tax rate

If you’re single and you made $40,000 in 2012 – again, in taxable income – you do fall in to the 25% tax bracket, but that doesn’t mean the federal government will take exactly 25% of your income and leave you 75%. They’ll take less than that.

That figure, 25%, is the amount taxed on your last dollar. Your last dollar, number 40,000, falls into the 25% bracket.

Meanwhile, dollar number 1 falls into the 10% bracket, and dollar number 8,700 falls into the 15% bracket.

Don’t be fooled, though: the marginal tax rate is not on a sliding scale, where dollar number 2 is taxed 10.000575% and dollar number 35,349 is taxed 14.9996%.

Again, this is a bracket system. Your taxable income moves up tiers, not a steady slope. This graph should make the idea a little clearer:

Marginal Tax Rates for a Single Person

Here we return to that second example, of a single person who earned $40,000 in taxable income:

• 10 cents each for dollars 1 – 8,700
• 15 cents each for dollars 8,701 – 35,350
• 25 cents each for dollars 35,351 – $40,000

This means that, in sum, you pay the federal government $6,030. That’s 15.1% of your gross income. This takes us to the final concept we’d like to explain to you: the effective rate, or the percentage of your income you pay the federal government.

Income tax rates for 2013: Changes from the fiscal cliff deal

As you likely know, these brackets were the subject of fiscal-cliff negotiations on Capitol Hill the last few months. The results are in, and it looks like, for most, taxes will be almost the same on 2013 paychecks.

The biggest exception is for high-income earners, who might now fall into a revised 35% Bracket or new bracket entirely, at 39.6%. The details are as follows:

Tax Brackets for 2013 Paychecks