When it comes to paying income taxes, there is a common misconception that you pay a single percentage rate for the entire amount. In other words, people often incorrectly assume that if you are bumped up to a higher tax bracket, you pay the higher tax rate for your entire income. However, this is not how the IRS arrives at your final federal income tax bill. To clarify how federal income taxes are actually calculated, we will look at an example using the tax bracket chart below.
Lets pretend that a married couple filing their taxes jointly earned a combined income of $100,000 for the year. To calculate the amount of federal income taxes they would have to pay on this amount, we need to start by looking at the "Regular Tax -- Married, Filing Jointly or Surviving Spouse" chart. The chart states that the first $0 to $19,750 of income is taxed at a rate of 10%. This means that the first $19,750 of their income is taxed at 10%, resulting in a tax bill of $1,975 for this amount ($19,750 * 10% = $1,975).
For the next $60,500 (the range from $19,750 to $ 80,250), income is taxed at a 12% rate. This results in a tax bill of $7,260 for this amount ($60,500 * 12% = $7,260).
Lastly, we see that the couple's combined income of $100,00 falls within the $80,250 to $171,050 range that is taxed at a rate of 22%. Of their total income, the amount over $80,250 will be taxed at the 22% rate. Subtracting $80,250 from $100,000, we find that $19,750 needs to be taxed at 22%. This results in a tax of $4,345 for this amount ($19,750 * 22% = $4,345).
Finally, to determine our total federal income tax bill for the year, we add up the tax amounts from the 10%, 12%, and 22% income tax bracket ranges. This brings us to a final tax bill of $13,580 ($1,975 + $7,260 + $4,345).
***notice that the total tax bill of $13,580 is significantly less than the $22,000 tax bill we would get if we used the 22% tax bracket for the entire $100,000 ($100,000 * 22% = $22,000).
