2012 Federal Income Tax Brackets and Marginal Tax Rates

The Federal Income Tax brackets and marginal tax rates for 2012 are out, and we’ll take a look at how the changes affect single taxpayers, those who are married filing jointly, those married filing separately, and head of household.

The changes from 2011 to 2012 are fairly small but they can have an impact for those who are at or over a threshold.

By knowing what bracket and marginal rate you may fall in, you can tax plan to lower your taxable income.

Every year the Internal Revenue Service, or IRS, uses inflation data to revise the bracket amounts.  Congress sets the marginal rate percentages with changes in the law.

Note the marginal tax rates are remaining the same in 2012 as they were in 2011.  It’s the dollar amount of the tax brackets that’s changing.

Before we jump into the changes I want to let you know that a qualifying widow(er) follows the same rates as married filing jointly.

The 10% tax bracket—the lowest marginal tax rate

The range of income covered by this bracket in 2011 was $0 to $8,500, but going into 2012, the upper limit is changed to $8,700.  Similarly, the married couples filing jointly will see a raise from $0-$17,000 to $0-$17,400.  Those married and filing separately follow the single filers with an upper limit of $8,700.  The head of household upper limit goes from $12,150 to $12,400.

The 15% tax bracket

In 2011, the 15% bracket covered income from $8,501 to $34,500 for individuals, $17,701 to $69,000 for couples filing jointly, $8,500-$34,500 for married filing separately, and $12,150-46,250 for head of household.

For 2012, there are small changes which bump the tax brackets to $8,701 to $35,350 for individuals, $17,401 to $70,700 for joint returns, $8,701 to $35,350 for married filing separately, and $24,401 to $47,350 for head of household.

Notice how married filing separately follows single filers so far.

The 25% tax bracket

For the 25% marginal tax rate in 2012, individuals will have a bracket of $35,351 to 86,650, and couples filing jointly will have a bracket of $70,701 to $142,700.  For those married filing separately the bracket is $35,351 to $71,350 (we see a divergence from single filers) and head of household’s bracket is $47,351 to $122,300.

Compare this to 2011, where in the 25% bracket, individuals had a bracket of $34,001 to $83,600, and couples filing jointly had a bracket of $69,001 to $139,500.  Married filing separately was $34,501 to $69,675 and head of household’s bracket was $46,251 to $119,400.

The 28% tax bracket

In 2012, this bracket will be from $86,651 to $178,650 for individuals (single), and $142,701 to $217,450 for couples filing a joint tax return.  Those married filing separately range from $71,351 to $108,725 while head of household ranges from $122,301 to $198,050.

This is a more noticeable change over 2011 levels, where the 28% bracket was $83,601 to $174,401 for individuals and $139,501 to $212,300 for couples filing jointly.  Married filing separately saw a range of $69,676 to $106,150 and head of household was $119,401 to $193,350.

The 33% tax bracket

The range for this bracket was $174,400 to $379,150 for individuals in 2011, but has been bumped to $178,651 to $388,350 for 2012.

The 33% tax bracket for married couples filing jointly also saw a marked increase from $212,301 to $379,150 in 2011 up to $217,451 to $388,350 in 2012.

For married filing separately in 2011 the bracket was $106,151 to $189,575.  In 2012 it’s $108,726 to $194,175.

Head of household had $193,351 to $379,150 in 2011 and that moves up to $198,051 to $388,350 in 2012.

As we go up in the brackets the changes become more noticeable.

The 35% tax bracket

Finally, there are the 35% tax rate brackets, which is less of a bracket and more of a permanent threshold.  This is because the bracket only has a minimum for an income range but no maximum.  Once you get over the minimum threshold, the same tax rate applies on all income beyond it.

In 2011, the single, married filing jointly,and head of household 35% brackets were all $379,151 and up.  For 2012, that’s been increased to a minimum of $388,351 for the 35% bracket, for a difference of $9,200.

Married filing separately, in 2011, kicked in at $189,576.  In 2012 the bracket starts at $194,176.

Marginal tax rates and they’re effect on your overall taxes

The marginal rate shows what percentage you will pay in taxes for the income that fall in a particular bracket.  What’s important to realize is that the U.S. tax system is a progressive tax.  That means as your income increases you pay more taxes.

But you don’t pay the tax rate on your entire income.

You only pay the marginal rate on that income that falls in the tax bracket.

“Marginal” refers to what’s happening at the margins, not on the total income.  Once you reach a new marginal rate, that is the rate that applies to all taxable income within that rate level.  The income earned below that level is taxed at the lower marginal rate—the higher marginal tax rate does not get applied all the way back to the first dollar of income earned.

When your income bumps you up to the next bracket you do pay a higher tax.  But you only pay the higher percentage for the income amount that falls in that bracket.

The income up to, but not including the next highest bracket, is taxed at the lower brackets marginal tax rate.

The best way to explain this is with an example.

Let’s say you are single and your taxable income for the year was $8,000.

That puts you in the 10% marginal tax rate (the bracket is $0-$8,701 for 2012). You are taxed 10% on your entire income because it falls within the income limits of the 10% tax bracket.

Let’s complicate it a bit now…

Let’s say that you make $10,000 in taxable income during 2012, which moves your marginal tax rate into the 15% bracket.

Is all of your income taxed at 15%.

Not at all.

Since the 10% bracket is 0 to $8,700, the first $8,700 of your income is taxed at 10%, or $870.  Only the remaining of $1,300 ($10,000 total, less $8,700 allocated to the 10% bracket) will be subject to the 15% tax rate, or $195.  Get it?

When you move up a marginal tax rate, only that portion of your income that falls into the higher Federal Income Tax bracket is taxed at the higher rate.

Here’s an updated chart to summarize the 2012 Federal Income Tax Brackets and Marginal Rates:

2012 Federal Income Tax Brackets and Marginal Tax Rates

Marginal Tax Rate	Single	Married Filing Jointly	Married Filing Separately	Head of Household
10% Bracket	$0-$8,700	$0-$17,400	$0-$8,700	$0-$12,400
15% Bracket	$8,701-$35,350	$17,401-$70,700	$8,701-$35,350	$12,401-$47,350
25% Bracket	$35,351-$86,650	$70,701-$142,700	$35,350-$71,350	$47,350-$122,300
28% Bracket	$86,651-$178,650	$142,701-$217,450	$71,351-$108,725	$122,301-$198,050
33% Bracket	$178,651-$388,350	$217,451-$388,350	$108,726-$194,175	$198,051-$388,350
35% Bracket	$388,351-	$388,351-	$194,175-	$388,351-

Resources:
U.S. Federal Individual Income Tax Rates History, 1913-2011 (Nominal and Inflation-Adjusted Brackets) | Tax Foundation
www.irs.gov/pub/irs-pdf/p505.pdf