When Congress passed the American Taxpayer Relief Act of 2012, which prevented the country from going over the fiscal cliff, there were some minor changes made to the 2013 federal income tax brackets.
In a nutshell, if your income is under $400,000 per year then you won’t be affected by the tax bracket changes. Here is a quick breakdown of the income tax rates you can expect for 2013.
|2013 Tax Brackets||Single||Married Filing Jointly|
|10 Percent||$0 to $8,925||$0 to $17,850|
|15 Percent||$8,925 to $36,250||$17,850 to $72,500|
|25 Percent||$36,250 to $87,850||$72,500 to $146,400|
|28 Percent||$87,850 to $183,250||$146,400 to $223,050|
|33 Percent||$183,250 to $398,350||$203,150 to $398,350|
|35 Percent||$398,350 to $400,000||$398,350 to $450,000|
|39.6 Percent||$400,000 and up||$450,000 and up|
Why Were the 2013 Tax Brackets Adjusted?
With Bush-era tax cuts set to expire at the end of the year, Congress needed to do something to prevent harsh tax increases that would have affected nearly all Americans and seriously threatened the economy.
No one wanted to see that happen, but there was considerable drama as legislators tried to agree on what income level would see the tax rate increase.
Republicans wanted to set the number at $1 million, but President Obama was aiming for a much lower number of $250,000. In the end they compromised on $400,000 for single tax-filers and $450,000 for married couples.
How Do Tax Brackets Work?
Contrary to popular belief, you do not pay the same tax rate on all of your income. The tax brackets simply tell you how much tax you will pay on income that falls within that bracket.
If that sounds confusing, don’t worry. The following example should help clear things up.
Let’s say you’re married and you and your spouse file jointly with a taxable income of $100,000. Go to the tax rate chart and you’ll see that you fall within the 25 percent tax bracket. But you will only pay 25 percent of the amount within that bracket.
Let’s go step by step to determine the actual tax rate using the chart above as reference.
- The first $17,850 of your income is taxed at 10 percent. ($17,850 x 10% = $1,785)
- Your income between $17,850 to $72,500 is taxed at 15 percent. ($54,650 x 15% = $8,197)
- Your income between $72,500 and $100,000 is taxed at 25 percent. ($27,500 x 25% = $6,875)
- $1,785 + $8,197 + $6,875 = $16,857
So even though your taxable income falls within the 25 percent bracket, you would only be paying an effective tax rate of just under 17 percent.