What's the Racket about Tax Brackets? A Look at How Tax Brackets Work

Understanding your tax bill starts with learning a few basics about your federal and state income taxes including how your taxes are calculated, some common tax deductions, credits that can reduce the amount you owe, and how to file taxes on your own.

This article provides a deeper look at income tax brackets, how they work, and what it means when people talk about marginal tax rates. The best part? It’s less complicated than you think.

What are tax brackets?

In the U.S., federal income taxes are progressive, which means different portions of your income are taxed at progressively higher rates. These portions of income are decided upon through tax brackets. Tax brackets provide the tax rate you will pay for each portion of your income.

For 2024 (taxes filed in 2025), the federal tax brackets are:

To learn more about the brackets, the Internal Revenue Service (IRS) has published them on IRS.gov.

Hawaii has 12 state income tax brackets. Here they are for the 2024 tax year:

You can see the brackets on the State of Hawaii Department of Taxation website.

How do tax brackets work?

Say you're a single person with $50,000 of taxable income. Using the charts above, you would be in the 22% federal tax bracket and the 8.25% Hawaii state tax bracket. In this example, you are referencing your marginal tax rate. Marginal tax rates refer to the highest tax bracket your income falls into.

However, because we have a progressive tax system, this doesn't mean that all of your income is taxed at 22% at the federal level and 8.25% at the state level. When you move into a higher tax bracket, only the income that falls into that higher bracket is taxed at a higher rate.

Returning to the example above, if you have taxable income of $50,000, on your federal return you'll pay a 10% tax rate on the first $11,600  of income, 12% tax rate on the ext $ $35,550 of income, and 22% tax rate on the last $2,850  of income. This is your effective tax rate (or the actual percentage of the taxable income that you owe.)

To look at it another way, let's do the math:

10% x $11,600  = $1,160

12% x $35,550  = $4,266

22% x $2,850  = $627

Total taxes you owe = $6,053

While your marginal tax rate is 22%, your effective tax rate is roughly 14% (the average tax rate your income falls into).

How to lower your tax bracket

You can get into a lower tax bracket by taking advantage of tax deductions and tax credits. Both tax deductions and tax credits can lower the amount of taxes you owe.

Income tax brackets can be complicated, but knowing how tax brackets work can help you understand how much you'll owe and identify ways to lower your tax bill. If your taxable income falls near the cutoff between brackets, you might be able to take advantage of deductions that will push you into a lower bracket.

Want to learn more about how to lower your taxes? Check out the next article in this series, Tax Credits vs. Tax Deductions: Making the Most of Your Tax Benefits.

Disclaimer - This material has been prepared for informational purposes only, and is not intended to provide nor should it be relied upon for tax, legal or accounting advice.  Please consult your tax, legal and/or accounting advisors for your specific situation.