Tax bracket facts for kids
Tax brackets are like different levels for how much tax people pay on their money. In many countries, the more money you earn, the higher the percentage of tax you pay on parts of that money. This is called a progressive tax system.
Think of it this way: your income is split into different sections, and each section has its own tax rate. So, you don't pay the highest tax rate on all your money, only on the part that falls into the highest bracket.
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How Tax Brackets Work: An Example
Let's imagine a simple tax system with three tax levels:
- Level 1: 10% tax on income from $1 to $10,000
- Level 2: 20% tax on income from $10,001 to $20,000
- Level 3: 30% tax on all income above $20,000
If someone earns $10,000, they pay 10% tax on that amount. So, they pay $1,000 in tax.
Now, imagine someone earns $25,000. Here's how their tax would be figured out:
- For the first $10,000: They pay 10% tax, which is $1,000.
- For the next $10,000 (from $10,001 to $20,000): They pay 20% tax. That's $2,000.
- For the last $5,000 (the part of their income above $20,000): They pay 30% tax. That's $1,500.
If you add these up ($1,000 + $2,000 + $1,500), their total tax is $4,500. Even though some of their money was taxed at 30%, their overall average tax rate on $25,000 is 18% ($4,500 divided by $25,000).
Tax Brackets Around the World
Different countries have their own tax bracket systems. These systems can change over time.
Tax Brackets in Australia
In Australia, the tax rates for people living there for the financial years 2018–19 and 2019–20 were:
| Taxable income | Tax on this income | Effective tax rate |
|---|---|---|
| 0 – $18,200 | Nil | 0% |
| $18,201 – $37,000 | 19c for each $1 over $18,200 | 0 – 9.7% |
| $37,001 – $90,000 | $3,572 plus 32.5c for each $1 over $37,000 | 9.7 – 21.9% |
| $90,001 – $180,000 | $20,797 plus 37c for each $1 over $90,000 | 21.9 – 30.3% |
| $180,001 and over | $54,097 plus 45c for each $1 over $180,000 | 30.3 – less than 45% |
These rates do not include the Medicare levy of 2.0%, which helps pay for healthcare.
Tax Brackets in the United States
In the United States, the tax brackets are updated often. Here are the tax brackets as of January 1, 2018, after a law called the Tax Cuts and Jobs Act was passed:
| Marginal tax rate | Single | Married filing jointly |
|---|---|---|
| 10% | Up to $9,525 | Up to $19,050 |
| 12% | $9,526 to $38,700 | $19,051 to $77,400 |
| 22% | $38,701 to $82,500 | $77,401 to $165,000 |
| 24% | $82,501 to $157,500 | $165,001 to $315,000 |
| 32% | $157,501 to $200,000 | $315,001 to $400,000 |
| 35% | $200,001 to $500,000 | $400,001 to $600,000 |
| 37% | over $500,000 | over $600,000 |
The amounts for things like the standard deduction (a set amount you can subtract from your income) and personal exemptions (amounts you can subtract for yourself and family members) are adjusted every year for inflation. This means the exact income ranges for each bracket can change yearly, even if the tax rates stay the same.
Important Tax Words in the US
When talking about taxes in the US, you might hear these terms:
- Gross salary: This is the total amount of money your employer pays you before any taxes or other deductions are taken out.
- W-2 wages: This is the amount of your income that your employer reports to the government. It's usually your gross salary minus any money you put into special plans, like retirement or health savings.
- Total income: This is the sum of all your taxable money, including your W-2 wages and other earnings like interest from a bank.
- Adjusted gross income (AGI): This is your total income minus certain allowed deductions, like some moving expenses or student loan interest.
- Itemized deductions: These are specific expenses you can subtract from your income to lower your tax. Examples include mortgage interest or state taxes you've paid.
- Standard deduction: This is a set amount that you can subtract from your income if your itemized deductions are not very high. It's a simpler way to lower your taxable income.
- Personal exemption: This is an amount you can subtract from your income for yourself and each person you support (like children).
These terms help figure out your taxable income, which is the final amount of money that taxes are calculated on.
See also
- Income tax threshold
- Bracket creep
