Tax brackets and tax rates are often discussed together, which can cause confusion for taxpayers. How do they differ, how are they related, and why are they important in the first place? Our Sacramento tax attorneys answer all of those questions in this article, while providing some key information about the differences between California’s tax system and the federal tax system. If you need help filing your state or federal income tax return for 2018, ask NewPoint Law Group about the tax preparation services we offer for businesses and individual taxpayers in California.
Tax Brackets vs. Tax Rates: What’s the Difference?
Put simply, “tax brackets” are different categories based on taxable income ranges. There are different sets of tax brackets for single filers, filers who are married filing jointly, filers who are married filing separately, and heads of households.
Each tax bracket is subject to a different “tax rate.” The tax rate is a reflection of the level at which a person (or business entity) is taxed on certain income. Higher tax brackets are subject to higher tax rates. This is known as a “progressive tax” system, as opposed to a “flat tax” system, in which all taxpayers would pay a constant rate.
For single filers, the federal tax brackets and rates for 2018 are as follows:
- $0 to $9,525 – 10%
- $9,526 to $38,700 – 12%
- $38,701 to $82,500 – 22%
- $82,501 to $157,500 – 24%
- $157,501 to $200,000 – 32%
- $200,001 to $500,000 – 35%
- $500,001 or more – 37%
To use a hypothetical example, imagine that Taxpayer earns $50,000 of taxable income per year. At first glance, that places Taxpayer in the $38,701 to $82,500 bracket, which has a tax rate of 22%. However, that does not mean Taxpayer’s entire $50,000 in taxable income will be taxed at a rate of 22%. Instead, Taxpayer’s first $9,525 of taxable income will be taxed at a rate of 10%, while income from $9,526 to $38,700 will be taxed at a rate of 12%. Only income over $38,700 – that is, only $11,300, or about a fifth of Taxpayer’s taxable income – will be taxed at a rate of 22%.
California Tax Brackets and Rates 2018
So far, our Roseville tax lawyers have been discussing federal taxes. However, it’s important for California taxpayers to understand that California has its own system, which in some ways, differs sharply from the federal system. For example, there are only seven tax brackets at the federal level, whereas California has nine tax brackets. The California income tax brackets for single filers are as follows:
- $0 to $8,015 – 1%
- $8,015 to $19,001 – 2%
- $19,001 to $29,989 – 4%
- $29,989 to $41,629 – 6%
- $41,629 – $52,612 – 8%
- $52,612 to $268,750 – 9.3%
- $268,750 to $322,499 – 10.3%
- $322,499 to $537,498 – 11.3%
- $537,498 or more – 12.3%
While these tax rates remain consistent, the brackets vary depending on the taxpayer’s filing status. For example, compare the single filer tax rates and brackets (above) with those for taxpayers who are married filing jointly in California (below):
- $0 to $16,030 – 1%
- $16,030 to $38,002 – 2%
- $38,002 to $59,978 – 4%
- $59,978 to $83,258 – 6%
- $83,258 to $105,224 – 8%
- $105,224 to $537,500 – 9.3%
- $537,500 to $644,998 – 10.3%
- $644,998 to $1,074,996 – 11.3%
- $1,074,996 or more – 12.3%
In California, there is also an additional 1% tax on personal income that exceeds a $1 million threshold. The proceeds from this tax go toward a fund that supports mental health services in California, as required by the Mental Health Services Act.
It is critical to note that these rates apply not to overall income, but specifically to “adjusted gross income” (AGI), meaning the income that remains once the taxpayer has finished subtracting any exemptions or deductions for which he or she qualifies.
Keep in mind that, in addition to various deductions and exemptions, California also offers a broad range of tax credits, which can also impact AGI. A few examples of California tax credits for individuals include the following:
- California Motion Picture and Television Production Credit
- Child and Dependent Care Expenses Credit
- College Access Tax Credit
- New Employment Credit
- New Home/First-Time Buyer Credit
- Nonrefundable Renter’s Credit
- Teacher Retention Credit
California State Income Tax Preparation Services in Roseville and Sacramento
Filing your tax returns correctly can be more challenging than it looks – particularly if your financial circumstances have been complicated by factors like freelance or self-employment income, property ownership, business ownership, bankruptcy and taxes, a medical emergency, or an inheritance. If you need help to file your state or federal tax return in 2019, rely on the dedication, knowledge, and experience of the unfiled tax return lawyers at NewPoint Law Group. Contact us online to get started, or call NewPoint at (800) 358-0305 to set up a free consultation today. We handle cryptocurrency tax issues, offshore voluntary disclosure issues, and many other types of tax matters.