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Year 2006 income brackets and tax rates

An individual's marginal income tax bracket depends upon their income and their tax-filing classification. As of 2006, there are six tax brackets (ranging from 10% to 35%) and four classifications: single, married filing jointly (or qualified widow or widower), married filing separately, and head of household.

An individual pays tax at a given bracket only for each dollar within that bracket's range. For example, a single taxpayer who earned $10,000 in 2006 would be taxed 10% of each dollar earned from the 1st dollar to the 7,550th dollar (10% * $7,550 = $755), then 15% of each dollar earned from the 7,551st dollar to the 10,000th dollar (15% * $2,450 = $367.50), for a total of $1,122.50. Notice this amount ($1,122.50) is lower than if the individual had been taxed at 15% on the full $10,000 (for a tax of $1,500). This is because the individual's marginal rate (the percentage tax on the last dollar earned, here 15%) has no effect on the income taxed at a lower bracket (here the first $7,550 of income taxed at 10%). This ensures that every rise in a person's pre-tax salary results in an increase of their after-tax salary, contrary to the popular misconception that being bumped into a higher tax bracket reduces after-tax income.

Claiming deductions may reduce an individual's tax liability by a rate equal to the marginal tax rate of their particular tax bracket, with a corresponding reduction in returns as the individual crosses in to a lower tax bracket. For example, if an individual is able to increase the amount of their deduction by $1000 with a last-minute donation to a charitable organization, and the individual's adjusted gross income is $500 in to the 25% marginal tax bracket, the donation will reduce the tax liability of the individual by ($500 * 25%) + ($500 * 15%) = $200.