How Tax Brackets Examples and Myth Busting - Fiscal Accounting and Bookkeeping

How Tax Brackets Examples and Myth Busting

Your tax bracket is not the tax rate you pay on all of your income after adjustments, deductions and exemptions.

Your tax bracket only determines the amount your income tax increases if you earn one additional dollar of income (ignoring the effects of rounding.)

We have tax brackets in the U.S. because we have a progressive income tax system. That means the more money you make, the higher a tax rate you pay. Your tax bracket becomes progressively higher.

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Progressive rates are based on the concept that high-income taxpayers can afford to pay a high tax rate.

Low-income taxpayers pay not just lower taxes overall, but a lower percentage of the income they do have.

Here’s how tax brackets work, an example

Say you’re single with no dependents, and your taxable income is $9,000.

Your marginal tax rate, according to the Federal Income Tax Brackets chart below, is 10%. You pay $900 in income tax. That’s simple.

What if your taxable income is $19,000?

As a Single filer, you’re now in the 15% tax bracket. That doesn’t mean you pay 15% on all your income, however. Some people think if they earn more money, they are in a higher tax bracket. They think they pay more taxes and may actually have less money left over than they would if they had earned less. Using the prior example, you can see that’s not true.

Each dollar you earn only affects the tax rate on additional income. It does not change the tax rate you pay on dollars in lower tax brackets.

Unless you are in the lowest tax bracket, you actually have two or more tax brackets. If you are in the 25% tax bracket, for example, you pay tax at three different rates – 10%, 15%, and 25% – on different levels of your income. Based on the tax brackets, you always have more money after taxes when you earn more. Of course, tax rates are not the only factor in your final tax bill.

When you have higher income, you can lose tax benefits, such as education credits, that phase out at higher income levels. For example, say you are considering working overtime and making an additional $1,000. If you know you’re in the 25% tax bracket, you’ll pay $250 in income tax on that money. You’ll also pay 7.65% in Social Security and Medicare employee withholding, plus any state tax and other mandatory withholding.

Earning an additional $1,000 is a great idea, but you don’t want to be surprised when you discover that one-third or more of your pay goes to taxes.

If you’re thinking about making cash or noncash contributions before the end of the year, knowing your tax bracket helps you determine how much your contribution will save you in taxes, assuming you are already itemizing your deductions.

How Tax Brackets Examples and Myth Busting

Your tax bracket is not the tax rate you pay on all of your income after adjustments, deductions and exemptions.

Your tax bracket only determines the amount your income tax increases if you earn one additional dollar of income (ignoring the effects of rounding.)

We have tax brackets in the U.S. because we have a progressive income tax system. That means the more money you make, the higher a tax rate you pay. Your tax bracket becomes progressively higher.

Blog 3

Progressive rates are based on the concept that high-income taxpayers can afford to pay a high tax rate.

Low-income taxpayers pay not just lower taxes overall, but a lower percentage of the income they do have.

Here’s how tax brackets work, an example

Say you’re single with no dependents, and your taxable income is $9,000.

Your marginal tax rate, according to the Federal Income Tax Brackets chart below, is 10%. You pay $900 in income tax. That’s simple.

What if your taxable income is $19,000?

As a Single filer, you’re now in the 15% tax bracket. That doesn’t mean you pay 15% on all your income, however. Some people think if they earn more money, they are in a higher tax bracket. They think they pay more taxes and may actually have less money left over than they would if they had earned less. Using the prior example, you can see that’s not true.

Each dollar you earn only affects the tax rate on additional income. It does not change the tax rate you pay on dollars in lower tax brackets.

Unless you are in the lowest tax bracket, you actually have two or more tax brackets. If you are in the 25% tax bracket, for example, you pay tax at three different rates – 10%, 15%, and 25% – on different levels of your income. Based on the tax brackets, you always have more money after taxes when you earn more. Of course, tax rates are not the only factor in your final tax bill.

When you have higher income, you can lose tax benefits, such as education credits, that phase out at higher income levels. For example, say you are considering working overtime and making an additional $1,000. If you know you’re in the 25% tax bracket, you’ll pay $250 in income tax on that money. You’ll also pay 7.65% in Social Security and Medicare employee withholding, plus any state tax and other mandatory withholding.

Earning an additional $1,000 is a great idea, but you don’t want to be surprised when you discover that one-third or more of your pay goes to taxes.

If you’re thinking about making cash or noncash contributions before the end of the year, knowing your tax bracket helps you determine how much your contribution will save you in taxes, assuming you are already itemizing your deductions.