Understanding progressive tax brackets

Many people sign and file their taxes every year without a deep understanding of how their taxes are calculated. Although you probably don't want to take a deep dive into the 7,000+ page federal tax code, having some understanding of the principles guiding this process is a good way to make sure you're filing properly and taking advantage of your tax situation where you can.

A good place to start is figuring out how your tax responsibilities are determined by understanding what a progressive tax is.

With a progressive tax system, the tax rate increases as taxable income rises. This helps ensure that a larger percentage of the taxes collected come from high-income taxpayers than low-income taxpayers.

Let's explore how a progressive tax can affect your finances.

Tax brackets are a fundamental component of the progressive tax system because they divide income into segments with each segment being taxed at a different rate. As your income increases, only the income within each bracket is taxed at the corresponding rate, not your entire income.

Here are the 2024-2025 tax brackets:

Keep in mind that these are the rates for federal income taxes. The tax brackets for your state income taxes may vary.

The tax rates shown in the tables above are marginal tax rates. Your marginal tax rate is the rate at which your last dollar of income is taxed.

For example, say you're married, you file a joint return with your spouse and your total taxable income for 2025 is $200,000. This puts you in the 22% tax bracket. In other words, your marginal tax rate is 22%.

However, you don't pay a 22% federal income tax rate on 100% of your income. Instead, you pay:

• 10% on the first $23,850 = $2,385
• 12% on the next $73,100 = $8,772
• 22% on the last $103,050 = $22,671

Your total tax bill on $200,000 of taxable income is $33,828. So your effective tax rate—or the actual percentage of your total taxable income—is around 17%.

Knowing the difference between your marginal and effective tax rates is crucial in a progressive tax system because it helps you understand the impact of changes in your income, such as a pay raise.

Maybe you're worried about a bonus or promotion pushing you into a higher tax bracket. That's only a concern if all your income would be taxed at a higher rate. In reality, only the income over the threshold of the new bracket is taxed at the higher rate.

Imagine you're a single filer with a taxable income of $95,000, placing you in the 22% tax bracket for 2025. If you receive a raise that increases your income to $110,000, part of your income will now be taxed at a 24% rate. You'll pay:

• 10% on the first $11,925 = $1,192
• 12% on the next $36,550 = $4,386
• 22% on the next $54,875 = $12,072
• 24% on the last $6,650 = $1,596

Only $6,650 of your $15,000 raise is subject to the 24% tax rate. The rest of your income is still taxed at the lower rates corresponding to the appropriate brackets, so you don't have to be concerned about paying higher taxes on your total income or losing more money because of the pay raise.

Laptop, finance and budget with a black couple in the living room of their home together for banking or accounting. Computer, savings and investment with a man and woman working on wealth management

Laptop, finance and budget with a black couple in the living room of their home together for banking or accounting. Computer, savings and investment with a man and woman working on wealth management

Upcoming changes to tax rates & brackets

Provisions from the Tax Cuts and Jobs Act that relate directly to individual income tax rates are set to expire on Dec. 31, 2025. Unless some or all of the provisions are extended, this will mean that most taxpayers will see a tax rate hike.

See options to mitigate potential negative impacts

Understanding the progressive tax system might make you feel better about earning more, but chances are you still want to minimize the taxes you pay. Fortunately, several strategies may help reduce your tax burden. Here are some tips to consider:

Tax deductions reduce your taxable income. Look into available tax deductions, including those for charitable giving, paying student loan interest or contributing to a health savings account.

Contributing to certain tax-deferred retirement accounts may reduce your taxable income depending on your modified adjusted gross income and participation in a qualified employer-sponsored plan. The money you contribute to these plans is pre-tax, which may lower your current year's taxable income. Plus, it helps you build your retirement nest egg.

Tax credits are like turbo-charged tax deductions. Instead of lowering the income subject to tax, they reduce the taxes you owe, dollar for dollar. Ask your tax advisor about tax credits applicable to your situation. Some potential tax credits include:

• Child tax credit
• Child and dependent care credit
• Earned income tax credit
• Clean vehicle credit
• Lifetime learning credit
• American opportunity tax credit
• Saver's Credit

If possible, defer additional income to the next tax year, especially if you expect to be in a lower tax bracket. This could include deferring end-of-year bonuses or other supplemental income.

Consider accelerating deductible expenses if you anticipate a higher income in the current year. For example, if you own a business, you might purchase significant supplies before year-end. If you itemize your deductions, bunching a few years' worth of charitable contributions can provide a larger deduction.

You can effectively reduce your tax bill by lowering your taxable income and taking advantage of tax credits.

Tax rates could increase starting in 2026 unless Congress extends the current income tax brackets.

Many aspects of the Tax Cuts and Jobs Act, including the current tax brackets and the range of income in each bracket, are set to expire at the end of 2025. If that happens, marginal rates would increase for most taxpayers.

Congress could act before then to extend the current tax structure or make other changes, but there are no guarantees.

Understanding the progressive tax system, particularly how tax brackets and marginal and effective tax rates work, can help you better manage your tax obligations and plan for the future. To ensure you align your tax-saving strategies with your overall financial goals, consult a Thrivent financial advisor and develop a personalized plan to help secure your financial future.