Tax ladder is a term sometimes used to refer to the formula for calculating a taxpayer's tax liability in a given year for United States federal personal income tax purposes. The term "ladder" is used because as your taxable income increases, you "climb" the ladder and your tax rate increases.

The formula begins with the taxpayer's gross income

Gross income

Gross income in United States tax law is receipts and gains from all sources less cost of goods sold. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident."Except as otherwise provided" by...

, as defined by the Internal Revenue Code

Internal Revenue Code

The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...

 § 61(a). From gross income, the taxpayer may subtract the amount of any deductions listed in § 62(a) ("above the line deduction

Above the line deduction

In the United States, an above the line deduction is a term used to describe those deductions which the Internal Revenue Service allows a taxpayer to subtract from his or her gross income. These deductions are set forth in Internal Revenue Code Section 62. A taxpayer's gross income minus his or...

s") to arrive at an adjusted gross income

Adjusted Gross Income

For United States individual income tax, taxable income is adjusted gross income less allowances for personal exemptions and itemized deductions. Adjusted gross income is total gross income minus specific items laid out in the tax code...

. The taxpayer then subtracts the appropriate amount for personal exemptions under § 151(d)(1) (as adjusted annually for inflation

Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

 under § 151(d)(4)). Finally, the taxpayer subtracts either the appropriate standard deduction

Standard deduction

The standard deduction, as defined under United States tax law, is a dollar amount that non-itemizers may subtract from their income and is based upon filing status. It is available to US citizens and resident aliens who are individuals, married persons, and heads of household and increases every...

 under § 63(c) or the total of itemized deductions under § 63(d) to arrive at the taxpayer's taxable income

Taxable income

Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that...

 for that tax year.

Taxable income serves as the base against which the taxpayer's tax rate is applied. After multiplying taxable income by the tax rate, the taxpayer may subtract the amount of any credits, then must add any additions to tax (such as the Alternative Minimum Tax

Alternative Minimum Tax

The Alternative Minimum Tax is an income tax imposed by the United States federal government on individuals, corporations, estates, and trusts. AMT is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold . This exemption is substantially higher than the...

). This calculation results in the taxpayer's tax liability, which is the actual amount the taxpayer owes for that tax year.

See also

• U.S. Federal Income Tax Rate Schedule
  Rate schedule (federal income tax)
  A rate schedule is a chart that helps United States taxpayers determine their federal income tax burden for a particular year. Another name for “rate schedule” is “rate table.”- Origin :...