Chapter 2. Federal tax rate schedules for individuals

Your federal tax rate schedule depends on your level of taxable income and your personal status. Each year, the tax rate schedule are adjusted to reflect changes in calculating the amount of tax payable.

How to

There are four types of tax rate schedules. You need to know which schedule applies to your situation. If your filing status is single, Schedule X applies to you, If your status is married but filing separately, Schedule Y-2 applies to you. If your status is married and filing jointly or qualifying widow(er), Schedule Y-1 applies to you. If your status is the head of a household, Schedule Z applies to you. Depending on the schedule, some extent of rates applies to taxable income, which ranges between 10% and 37%.

 

 

Now, how can we calculate our tax rates?

You first need to know your schedule based on your status, and then apply the appropriate rates depending on your taxable income. Then you can calculate tax liability and your average tax rate.

*For more information on Federal tax rate schedules, check out Publication 17 or visit https://www.irs.gov/ Links to an external site.

 

How to calculate your average tax rates!

 

To clarify the calculation of the tax rates, let's follow a hypothetical example of Amy, using the 2018 Federal tax rates. 

Amy is a single person, and her taxable income is $38,700. Because she is single, Schedule X applies to her. 

There are 7 different rates (10, 12, 22, 24, 32, 35, 37 [%]) to accommodate all levels of taxable income. The highest rate is 37% of taxable income over $500,000 in the 2018 tax year. In the case of Amy, two rates are applicable as of 2018: 10% on the first $9,525 and 12% on the amount over $9,525 but not over $38,700. In other words, 10% applies to $9,525 and 12% applies to $29,175

Therefore, the tax liability in this case would be $952.50 (= 10% of $9,525) plus $3,501.00 (= 12% of $29,175) or a total tax liability of $4,453.50

To find out your average tax rate, divide your tax liability into your taxable income. In the example of Amy, the average rate is 11.51% =  (4,453.50/38,700)

 

You are probably wondering how you can use this information to make more informed financial decisions.  Think of job promotion or job transfer that you might be offered in the future. Wouldn't you want to know the impact of your decision on taxes to know if your move brings financial gain?  

 

Practice

Now that you fully understand tax rates, think of paying it forward, calculate your tax rate, discuss these rates with a friend or a family member. 

 

Congratulations!  You can move on to Chapter 3. Tax withholding process - W4 & W2

To review the full module on Federal Tax for the US individuals, click here.