Karla Dennis, EA, MST, is CFO/CEO of the award-winning tax accounting firm KDA Inc.—specializing in tax planning.
Taxes can feel overwhelming, especially when it comes to tax brackets. In this article, I’m breaking down exactly what tax brackets mean so you can better understand how much you’re really paying in taxes and how to reduce your tax liability.
Tax Brackets 101
Let’s start with the basics: Tax brackets are progressive. That means your entire income isn’t taxed at one flat rate. Rather, it is taxed in layers.
Let’s take a look at how this works, using figures from tax year 2025. (Please note: These figures are for illustrative purposes only; tax brackets are subject to change.) So, for example, if you fall into the 22% tax bracket, that doesn’t mean your entire income is taxed at 22%. For an individual taxpayer, the first $11,925 would be taxed at 10%, the next portion up to $48,475 at 12% and the remaining portion at 22%.
This is where your effective tax rate comes in. Your effective rate is the actual percentage of your income that goes to taxes. Let’s say you earned $50,000 and paid $5,000 in taxes; your effective tax rate would be 10%. This differs from your marginal tax rate, which is the tax rate that applies to the highest dollar of income you earn. It’s important to understand the difference because it affects how you plan your finances and deductions.
Deductions play a big role here. The standard deduction—adjusted annually by the IRS—reduces your taxable income. For example, if your income is $48,000 and the standard deduction is $15,000 for an individual, you’ll only be taxed on $33,000. Deductions could drop you into a lower tax bracket, reducing how much tax you owe.
But tax credits are even more powerful than deductions. While deductions reduce your taxable income, credits reduce your tax bill dollar for dollar. For example, a $2,000 child tax credit would directly lower your tax liability from $20,000 to $18,000. Many tax credits are available, including those for childcare, business startups, retirement plan contributions and more—so knowing which ones apply to your situation can significantly reduce your tax burden.
Another strategy is to focus on capital gains and qualified dividends, which are generally taxed at lower rates than regular income. If you sell a capital asset such as stock or real estate after holding it for more than a year, it qualifies as a long-term capital gain, potentially taxed at just 0%, 15% or 20% depending on your income level. By contrast, short-term capital gains (on assets held for less than a year) are taxed at your ordinary income rate. Structuring income around capital gains and dividends is a smart tax strategy for long-term financial efficiency.
It’s essential to remember that only the income within each bracket is taxed at that bracket’s rate. For instance, someone earning $150,000 is in the 24% tax bracket, but not all of that $150,000 is taxed at 24%. Excluding deductions or credits, only $46,650 of the $150,000 is taxed at 24%, with the rest taxed at lower rates in the preceding brackets.
Your filing status also matters. Whether you’re single, head of household, married filing jointly or a qualifying widower will affect which bracket you fall into.
And yes, tax brackets can change. The IRS adjusts tax brackets, standard deductions and other key figures to account for inflation and policy shifts. As of 2025, the highest marginal tax rate is 37%—but again, only a portion of income for the highest earners reaches that rate.
Bringing It All Together
Here’s a quick recap:
• Tax Brackets: Progressive rates applied in layers as income increases
• Marginal Tax Rate: The rate applied to your last dollar of income
• Effective Tax Rate: The average percentage of income you actually pay in taxes
• Deductions: Lower your taxable income
• Credits: Directly lower your tax liability
• Capital Gains/Dividends: Often taxed at lower rates than regular income
Understanding how the system works—and how to navigate it—can make a huge difference in how much you pay in taxes. When you know better, you do better. Stay informed, stay strategic and stay ready because the tax code is always evolving.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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