Income tax is imposed on any citizen, resident or non-resident, business entity and other organizations under the income tax policies adopted by the Federal government. In order to determine a particular amount of tax which must be paid, tax rates and tax brackets have been defined by the law.
The calculation of income tax depends upon these rates and brackets which makes it quite simple for the taxpayers to assess their taxes and file the returns.
Tax brackets can be precisely defined as income slabs which are pre-decided to guide the taxpayers as to how much amount is to be paid as income tax. Every tax bracket has a tax rate associated with itself. This means that if any taxpayer has an income in the range of a particular tax bracket, the income tax will be calculated according to the rate that corresponds to the income slab. As per the tax brackets and tax rates defined for year 2010, there are 6 brackets in all. The first tax bracket is from $0 to $8,375 and any person falling under this slab is taxed at 10 percent of the income. The next slab is $8,376 to $34,000 and has a tax rate defined to be 15 percent. $34,001 to $82,400 is the third tax bracket and the tax rate corresponding to it is 25 percent. With an associated rate of 28 percent, the $82,401 to $171,850 slab is next tax bracket. The fifth one has an income slab of $171,851 to $373,650 and a tax rate of 33 percent. Whereas, the last tax bracket is defined to be $373,651 and above and has a tax rate of 35 percent corresponding to it.
On the basis of these brackets and rates, the amount of money to be paid as income tax is calculated. The calculation is quite easy to understand. For the first $8,376, the taxpayer has to pay 10 percent which is around $873. After this, if the taxable income is more than the higher limit of the first bracket, then the upper limit of the first bracket is deducted from the taxable income first. The amount that remains is then compared with the given brackets and accordingly the tax is calculated for that case. In the end, the amounts that are calculated are added together to give the total income tax to be paid.