:max_bytes(150000):strip_icc()/101405194-5bfc2b8c46e0fb0051bddfc9.jpg "Federal Tax Brackets: What They are, History")
:max_bytes(150000):strip_icc():format(jpeg)/101405194-5bfc2b8c46e0fb0051bddfc9.jpg)
What Are Federal Tax Brackets?
The federal tax brackets are income ranges the Internal Revenue Service (IRS) uses to determine the percentage of tax to be paid by individuals, corporations, and trusts. The brackets are adjusted for inflation annually.
The U.S. has a progressive tax system, meaning that the tax percentage rises with the income of the taxpayer.
Key Takeaways
- Federal tax brackets are set by law, and determine the tax rates for individuals, corporations, and trusts based on the income of the filer.
- The modern U.S. income tax system was created in 1913, in large part to fund the nation’s participation in World War I.
- There are currently seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Understanding Federal Tax Brackets
Federal tax brackets are progressive, meaning that the higher your income, the higher your tax rate. This does not always translate into paying more in tax dollars, because of the deductions and credits that can be applied against the tax that you owe.
When the federal tax brackets were created in 1913, the goal was to raise money for the nation’s defense. In the subsequent decades, special interest groups lobbied for more and more deductions, particularly for businesses. By 2018, 91 corporations, including 60 of the Fortune 500 companies, paid nothing.
Tax Code Overhaul
The most recent extensive overhaul of the tax code came at the end of 2017 when the Tax Cuts and Jobs Act (TCJA) was signed by then-President Donald Trump.
The TCJA permanently reduced the corporate tax rate while reducing individual rates only temporarily, until 2025. This was largely due to concerns about the debt these new tax reductions would add to the already large U.S. debt total.
In fact, the national debt has increased, from about $25.86 trillion in 2017 to about $34.09 in 2024. That is due to more than tax cuts, as it reflects unprecedented federal spending to cope with the effects of the COVID-19 pandemic starting in 2020.
With the 2017 tax overhaul, high earners saw the largest reduction in taxation. Low-wage earners, who also had their taxes cut, could conceivably pay more when—and if—the individual tax changes expire as planned in 2025.
94%
The highest tax bracket ever levied in the United States, set during World War II.
History of the Federal Tax Brackets
The 16th Amendment was ratified in 1913, and the federal tax bracket was born. In 1913, the top tax bracket was 1% on incomes above $3,000, with a 6% surcharge on incomes above $500,000.
It didn’t take long for the rate to rise dramatically. By 1918, as the true cost of World War I became evident, the top tax rate reached as high as 77%. Rates came down again during the prosperous 1920s, only to rise during the Great Depression.
The decision to raise tax rates during a depression became an example of what not to do during difficult times and was cited frequently during the debate over the Troubled Asset Relief Program (TARP) at the start of the 2008-2009 Great Recession.
By the end of World War II, the top tax bracket reached 94%. The rate remained high in subsequent years, averaging around 70%.
Rates have been coming down ever since, starting in the 1980s Reagan administration. As of the 2025 tax year, there are seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
It is probably no coincidence that the U.S. debt has ballooned during the modern era, as the country has engaged in several wars while lowering tax rates instead of raising them, as was done during previous wars.
What Is the Standard Deduction for 2024 and 2025?
For the 2024 tax year, the standard deduction is $14,600 for individual filers and $29,200 for couples filing jointly.
The standard deduction for the 2025 tax year is $15,000 for individuals and $30,000 for couples filing jointly.
The standard deduction is the dollar amount that a taxpayer can subtract from total income before income taxes are applied.
Do Any Individuals Pay Little or No Income Taxes?
For the 2025 tax year, people who report incomes of $11,925 or less (or couples who report $23,850 or less) are in the lowest tax bracket. at 10%. Many of these low-income people are also eligible for the Earned Income Tax Credit, which further reduces their tax bill and can even results in a refund of taxes they paid during the year.
Which Individuals Pay the Highest Income Tax Rate?
For the 2025 tax year, individuals with an income of $250,525 (or couples who report $501,050 in joint income) pay the highest rate, at 37%. Moreover, many of the deductions that individual filers once used to reduce their tax bills were wiped out with the 2017 Tax Cuts and Jobs Act, so that number is more meaningful than it was before.
The Bottom Line
The U.S. government has collected income taxes from its citizens periodically since 1861, when it imposed a flat 3% tax on incomes of $800 or more to fund the Civil War. But it was only in 1913 that the modern income tax system was put in place, complete with tax brackets that imposed progressively higher rates on higher earners.
IThe U.S. tax system has undergone countless revisions since then, but it’s safe to say the system isn’t going away soon.