US Tax Breakdown

How US Federal Tax Brackets Actually Work

The US uses a progressive tax system, which means your income is divided into "brackets" and each bracket is taxed at a different rate. This is one of the most misunderstood aspects of the tax system — many people believe that moving into a higher tax bracket means all their income is taxed at that higher rate. This is incorrect.

For example, a single filer earning $100,000 in TY 2025 (filed by April 15, 2026, or October 15, 2026 with extension) computes federal tax bracket-by-bracket — not as a flat 22%. Using IRS Rev. Proc. 2024-40 brackets:

• First $11,925 at 10% = $1,192.50
• Next $36,550 ($11,925 → $48,475) at 12% = $4,386.00
• Next $36,525 ($48,475 → $85,000 taxable after $15,000 standard deduction) at 22% = $8,035.50

Total TY 2025 federal tax on $100,000 gross (single, std deduction): ≈ $13,614, an effective federal rate of ~13.6% — far below the 22% marginal rate.

For TY 2026 (filed in 2027), the brackets shift slightly upward for inflation per IRS Rev. Proc. 2025-32: 10% to $12,150, 12% to $49,425, 22% to $105,275, 24% to $201,100, 32% to $255,400, 35% to $638,750, 37% above.

TY 2025 vs TY 2026 Standard Deduction

The One Big Beautiful Bill Act (OBBBA), signed July 2025, made the Tax Cuts and Jobs Act (TCJA) brackets and deductions permanent — they no longer sunset after 2025. Standard deductions adjusted for inflation:

• TY 2025 — Single $15,000 · MFJ $30,000 · HoH $22,500 (Rev. Proc. 2024-40)
• TY 2026 — Single $15,750 · MFJ $31,500 · HoH $23,625 (Rev. Proc. 2025-32, Oct 9 2025)

Seniors age 65 and older receive an additional $4,000 bonus deduction under OBBBA provisions in both tax years.

New OBBBA Tax Benefits: Tips, Overtime, and Senior Deduction

OBBBA introduced several new tax benefits effective for TY 2025 and TY 2026:

No Federal Income Tax on Tips

From TY 2025 onward, qualifying cash and credit-card tips are exempt from federal income tax (still subject to FICA). For a server earning $20,000 in tips at a 22% marginal rate, that's a ~$4,400/year federal tax saving.

Overtime Pay Deduction

Overtime pay (premium portion above regular wages) is deductible from federal taxable income for TY 2025+. If you earn $10,000 in overtime, that comes off your taxable base before federal tax is computed. FICA still applies, but federal income-tax savings can be substantial for hourly workers logging long weeks.

Capital Gains for TY 2025 (Long-Term)

Long-term capital gains and qualified dividends use a separate three-tier rate schedule of 0% / 15% / 20%. For TY 2025 single filers, the 0% bracket runs up to $48,350 of taxable income; 15% applies up to $533,400; 20% above. For MFJ, the thresholds are $96,700 and $600,050. These rates have not changed under OBBBA.

State Income Tax: The Hidden Variable

While federal taxes get most of the attention, state income tax can significantly impact your take-home pay. The difference between living in a high-tax state like California (up to 13.3%) versus a no-tax state like Texas or Florida can mean thousands of dollars per year.

Nine states have no income tax: Alaska, Florida, Nevada, New Hampshire (dividends/interest only), South Dakota, Tennessee, Texas, Washington, and Wyoming. If you're considering relocating or working remotely, use our state comparison tool to see exactly how much you'd save.

Self-Employed vs W-2: The Real Tax Difference

Self-employed individuals (1099 contractors) face a significant tax disadvantage: the self-employment tax. As a W-2 employee, you pay 7.65% of your income for Social Security and Medicare, and your employer pays a matching 7.65%. As a self-employed person, you pay both halves — a total of 15.3%.

This means that to have the same take-home pay as a W-2 employee, you need to charge approximately 7-8% more as a contractor. Our calculator includes a W-2 vs 1099 comparison to help you understand this difference.

How to Lower Your Tax Bill Legally

There are several legal strategies to reduce your tax burden:

• Maximize retirement contributions: Traditional 401(k) and IRA contributions reduce your taxable income
• Use an HSA: Health Savings Account contributions are tax-deductible if you have a qualifying high-deductible health plan
• Itemize if beneficial: If your itemized deductions (mortgage interest, state taxes up to $40,000, charitable contributions) exceed the standard deduction, itemize
• Claim all credits: Child Tax Credit, Earned Income Tax Credit, education credits — make sure you're claiming everything you're entitled to