Federal Ordinary Income Tax
How federal income tax is calculated using progressive tax brackets
How it works
Federal income tax uses a progressive bracket system where different portions of income are taxed at different rates. Higher income pushes you into higher brackets, but only the income within each bracket is taxed at that rate. This is why your marginal rate (highest bracket) differs from your effective rate (average across all income).
1. Calculate Taxable Income
Start with AGI and subtract standard or itemized deductions
Taxable Income = AGI - Standard/Itemized Deductions - QBI Deduction
Example: $150k AGI - $30k standard deduction = $120k taxable income2. Apply Tax Brackets
Calculate tax for each bracket that your income passes through
2024 Married Filing Jointly: 10%: $0 to $23,200 12%: $23,200 to $94,300 22%: $94,300 to $201,050 24%: $201,050 to $383,900 32%: $383,900 to $487,450 35%: $487,450 to $731,200 37%: Over $731,200
Example: $120k taxable income: $23,200 × 10% = $2,320 $71,100 × 12% = $8,532 $25,700 × 22% = $5,654 Total: $16,5063. Subtract Tax Credits
Credits reduce tax dollar-for-dollar after calculation
Final Tax = Calculated Tax - Tax Credits
Example: $16,506 tax - $2,000 child credit = $14,506 final tax4. Calculate Marginal Rate
Your highest tax bracket determines marginal rate
Marginal Rate = Tax Rate of Highest Bracket Reached
Example: $120k income reaches 22% bracket → 22% marginal rate5. Calculate Effective Rate
Federal tax as a share of AGI for this single year. This is not an average across projection years; the Summary Tab's Avg Tax Rate card averages combined federal + state rates across every year.
Effective Rate = (Federal Tax / AGI) × 100%
Example: $14,506 federal tax / $150k AGI = 9.7% effective rate
Real-world context
Progressive Tax System
The U.S. uses a "progressive" tax system where higher income is taxed at higher rates. However, it's marginal - only the dollars within each bracket are taxed at that rate. Moving into a higher bracket doesn't mean all your income is taxed at that higher rate, only the portion that exceeds the bracket threshold.
IRS reference: Publication 17 - Your Federal Income Tax
Marginal vs Effective Rate
Your marginal rate (e.g., 22%) is the rate on your next dollar of income - important for planning Roth conversions or additional income. Your effective rate (e.g., 12%) is what you actually pay on average - important for understanding total tax burden. The effective rate is always lower than marginal because lower brackets are filled first.
Top-Bracket Itemized Deduction Haircut (2026+)
Starting in tax year 2026, the OBBBA (Section 70101) restores a haircut on itemized deductions for taxpayers in the 37% top bracket. The haircut formula is: (2/37) x the lesser of (a) total itemized deductions or (b) taxable income in the 37% bracket. Practical result: each dollar of itemized deduction that reduces 37%-bracket income saves 35 cents in federal tax instead of 37 cents. The haircut is zero for clients below the 37% threshold, and standard-deduction filers are completely unaffected. This differs from the pre-TCJA Pease limitation (3% rate with 80% floor) — structurally similar but using a different formula. QBI (Section 199A) is not subject to the haircut. The Tax Breakdown Modal shows a 'Top-bracket limitation' line item and the Data and Assumptions report notes 'Active 2026+' when this provision applies.
IRS reference: OBBBA Section 70101; IRC Section 68 (restored)
Tax Planning with Brackets
Understanding bracket thresholds enables powerful strategies: fill the 12% bracket with Roth conversions, avoid pushing into 24% with careful timing of income, and charitable deductions reduce tax at the client's marginal rate (a taxpayer in the 22% bracket saves $0.22 per dollar donated).
What drives the result
Higher AGI means more income taxed at higher brackets, increasing effective rate
$100k AGI → mostly 12% bracket. $200k AGI → reaches 22% and 24% brackets
Larger deductions reduce taxable income and may drop you into lower brackets
$30k standard vs $50k itemized → $20k less income taxed, saves ~$4,400 at 22%
Married brackets are roughly double single brackets (marriage bonus)
Single 24% bracket starts at $100k. Married starts at $201k (2x wider)
Conversions add to ordinary income, filling brackets and increasing marginal rate
$30k conversion fills 22% bracket → all taxed at 22%. Larger conversion spills into 24%
Assumptions
- Tax brackets indexed annually for inflation
- Standard deduction amounts are year-specific: $29,200 (MFJ 2024), $30,000 (MFJ 2025), indexed for subsequent years when Tax Bracket Indexing is enabled
- Federal income tax only — state income tax is calculated separately using the effective rate in the Assumptions Panel; see State Income Tax help
- Tax credits applied after bracket calculation
- Filing status determines bracket thresholds
Limitations
- Does not include Alternative Minimum Tax (AMT) calculation
- Itemized deduction top-bracket haircut (OBBBA Section 70101, IRC Section 68): for tax years 2026 and later, itemizers with income in the 37% bracket have their itemized deductions reduced by 2/37ths of the lesser of total itemized deductions or 37%-bracket exposure. This is fully modeled — see Standard vs Itemized Deduction help for details. Standard-deduction filers and QBI (Section 199A) are not affected.
- State income tax is calculated separately as a flat effective rate — see State Income Tax help for configuration and exemption details
- NIIT (3.8% surtax, IRC §1411) is calculated separately and added to total federal tax — see Capital Gains Tax help for detail on which income types are included
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Related
This page explains how Stratum models this calculation. It is educational material for financial professionals, not tax or legal advice, and tax law changes. Verify current figures against primary IRS sources before relying on them with a client.