“That’s Above My Tax Bracket”

I had a conversation with a friend the other day who said they didn’t want to get a work bonus because it was going to send them into a higher tax bracket. What my friend didn’t know was that the US tax system is progressive. This means that our income gets broken down into chunks. These chunks are taxed at separate levels. Let’s learn how the US income tax brackets work.

What Are the Tax Brackets?

The tax brackets are ranges of income that become taxed at specific percentages. In 2024, the income tax rates are 10%, 12%, 22%, 24%, 32%, 35%, & 37%. For example, the 10% tax rate will be applied to any income made between $0 - $11,600. Any income made between $11,601 - $47,150 will be taxed at the 12% rate. As you can see, income only becomes taxed at a higher rate once it reached the next bracket.

This means the income tax in the US is a progressive system. The top portion of your income may be taxed at 22%, but not all your income would be taxed at 22%. Let’s look at an example.

Your Income: $60,000

• The first $11,600 will be taxed at 10%

• Income from $11,601 - $47,150 will be taxed at 12%

• Income from $47,151-$60,000 will be taxed at 22%

Your total income tax would be $8,253

How Much of My Income Truly Gets Taxed?

If you’re curious how much of your income gets taxed (taken), you’ll need to determine the Effective Tax Rate. This rate is found by dividing the total amount of taxes owed by your total income. When using the example above, we can take $8,253 / $60,000 and find our effective tax rate to be 13.76%. Remember the top amount of income was taxed at 22% but the true amount of your income paid to the IRA was 13.76%.

Debunking the Tax Bracket Myth

As mentioned in the intro paragraph, many believe that once they enter a higher tax bracket, all their income will be taxed at that new rate. We now understand that our income tax system is progressive, our top tax bracket will differ from our effective tax rate. Keep this in mind when someone tells you not to work overtime or accept that bonus because “you’ll be sent into a higher tax bracket”. Although it’s true you’ll pay more taxes entering a higher tax bracket, you’ll still have more take home money as your income increases.

Know Someone Who Would Love This?

The link below will take you to the magical land of learning also known as the landing page. If you were forwarded this email, you can receive this daily newsletter tomorrow by clicking that blue button below and sharing your email address.