The U.S. tax system is built on graduated tax rates, meaning different portions of your income are taxed at different percentages. This structure ensures that taxpayers only pay higher rates on the income that falls into higher brackets — not on their entire earnings.
For 2026, there are seven federal income tax rates:
10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Below, we break down how these brackets work plus a quick look at how capital gains fit into the picture.
How Tax Brackets Actually Work
A tax bracket is simply a range of income taxed at a specific rate. Many people mistakenly believe that being “in the 22% bracket” means paying 22% on all their income — but that’s not how the system works.
Example: Single Filer in the 22% Bracket (2026)
Your taxable income is taxed in layers:
- 10% on income up to $12,400
- 12% on income from $12,401 to $50,400
- 22% on income from $50,401 to $105,700
Only the income within each bracket is taxed at that bracket’s rate.
Where Capital Gains Fit Into Your Tax Picture
Capital gains — profits from selling investments such as stocks, real estate, or mutual funds — are taxed differently from ordinary income. They do not use the same graduated brackets described above.
Two Types of Capital Gains
Short‑term capital gains:
Profits from assets held one year or less.
- These are taxed at your ordinary income tax rates, meaning they follow the same brackets listed earlier.
Long‑term capital gains:
Profits from assets held more than one year.
- These receive preferential tax rates — typically 0%, 15%, or 20%, depending on your taxable income. (discussed at a later time)
Why This Matters
Capital gains can push your taxable income higher, which may have later domino effect consequences.
- Move part of your income into a higher tax bracket
- Affect eligibility for certain deductions
- Trigger higher long‑term capital‑gains rates
- Influence Medicare premiums and other income‑based thresholds
***For retirees and taxpayers 65+, capital gains planning can be especially important when combined with the new deductions and AGI limits introduced for 2026–2028.
- Marginal vs. Effective Tax Rate
- Marginal tax rate: The rate applied to your last rand earned (highest bracket reached).
- Effective tax rate: The average rate of tax on your total income (total tax ÷ total income). This is always lower than the marginal rate in a progressive