The United States Federal taxation system is a progressive model that taxes individuals differently based on their income. The more money an individual makes through their job, the higher their tax rate. All individuals are placed into a tax bracket; each tax bracket homes a different tax rate based on the person’s income.
Tax brackets are therefore are divisions at which tax rates change in the United States Federal tax system. In essence these divisions represent the cut off values for taxable income. This simply means that income past a certain point will be taxed at a higher or lower rate depending on the dip or spike of the income.
Tax brackets are the fundamental aspect of a progressive tax system. The idea behind the tax system is that those individuals who make the most money have an obligation to repay society through the taxation model. This is not to say that the individual is paying the majority of their salary; tax brackets are created to fairly distribute the responsibility of taxation among all its citizens. Suppose there are three tax brackets in a given model: 10%, 20%, and 30%.
The 10% bracket applies to all incomes under $10,000; the 20% tax bracket applies to incomes over $10,000 and up to $20,000; and the 30% tax bracket applies to all income over $20,000. By viewing this hypothetical model, an individual who earns $10,000 per year will pay 10% or $1,000 in annual taxes. In contrast, an individual who earns $40,000 has a more complicated calculation due to their tax brackets.
The first $10,000 of their income is taxed at 10%, the following $10,000 is taxed at 20%, and the remaining $20,000 is taxed at the highest tax bracket, or 30%.