How Do Tax Brackets Work? (2024)

Transcript

Pop quiz: do you know what tax bracket you’re in? If you answered, “it depends,” you’re right, because parts of your income are probably taxed at different rates.

Say you have $50,000 in taxable income. Today, that dollar amount lands within the 22 percent bracket. But that doesn’t mean you pay that rate on the full $50,000.

Let’s explain.

In the U.S., your federal income tax is calculated through a progressive graduated rate system. Basically, if you make more, you’re taxed more.

Right now, we have seven tax brackets. Each bracket covers a range of taxable income, and the rate for each bracket gets progressively higher.

Any income within the range of the first bracket is taxed at that rate. The next dollar you earn over the first bracket falls into the second bracket, andonly those additional dollarswithin that range are taxed at the new rate.

This continues as your taxable income increases.

So, in our $50,000 example, this much gets taxed at 10 percent, only this much gets taxed at 12% percent, and only this much gets taxed at 22 percent.

As you can see, whatever your top tax rate is, it doesn’t apply toallof your taxable income – just the portion that falls into your highest bracket.

When we understand how brackets work, we can better understand the tax impact of picking up a second job, putting in overtime, or any other ways we might increase our income.

How Do Tax Brackets Work? (2024)

Transcript

Glossary

Downloads