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Writer's pictureRaine Rosé

How Tax Brackets Work

How Tax Brackets Work

Not sure how tax brackets affect you? Let’s break down how they impact what you pay in taxes!


Tax brackets can be confusing at first, but once you understand them, it becomes much clearer how your income is taxed. Here’s how they work:


1. What is a tax bracket?

A tax bracket is a range of income that is taxed at a specific rate. The U.S. has a progressive tax system, meaning the more you earn, the higher percentage of your income gets taxed, but only on the portion of income that falls into each bracket.


2. How do tax brackets work?

Let's say the tax brackets for a single filer look like this:

- 10% on income up to $10,000

- 12% on income from $10,001 to $40,000

- 22% on income from $40,001 to $85,000

- 24% on income from $85,001 to $160,000


If you earn $50,000:

- The first $10,000 is taxed at 10% = $1,000

- The next $30,000 ($10,001 to $40,000) is taxed at 12% = $3,600

- The final $10,000 ($40,001 to $50,000) is taxed at 22% = $2,200


So, in total, you’d pay $1,000 + $3,600 + $2,200 = $6,800 in federal income taxes.


3. Why don't you pay the higher rate on all your income?

Only the income that falls within a specific bracket is taxed at that rate. In the example above, only the portion of income over $40,000 is taxed at the 22% rate, not your entire $50,000.


4. How does this affect you?

Higher earnings push more of your income into higher brackets, but you only pay those higher rates on the income above the lower bracket thresholds. It's not an all-or-nothing situation, which means even if you fall into a higher tax bracket, not all your income gets taxed at that higher rate.


Does this clear things up? Let me know if you'd like to dive deeper into any part!


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