What is the concept of tax brackets?

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by liam , in category: Taxation and Accounting , 10 months ago

What is the concept of tax brackets?

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1 answer

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by kay.wiza , 10 months ago

@liam 

Tax brackets are a progressive system used by governments to determine how much income tax an individual or business owes based on their taxable income. The concept suggests that individuals or businesses with higher incomes should pay a higher percentage of taxes compared to those with lower incomes.


Tax brackets typically consist of a range of incomes, and each range is associated with a specific tax rate. As an individual or business's income increases and moves into a higher tax bracket, the tax rate applicable to that portion of income also increases. The tax rates progressively increase as the income levels rise, with the aim of achieving a fair distribution of the tax burden based on one's ability to pay.


For example, a tax bracket might have a lower income limit of $0 and an upper income limit of $50,000, with a tax rate of 10%. Then another tax bracket might have an upper income limit of $100,000 and a tax rate of 20%.


When filing taxes, individuals or businesses determine their taxable income, which is the remaining income after taking deductions and exemptions into account. They then calculate the tax owed by applying the relevant tax rate for each applicable tax bracket to the corresponding portion of their income.