What is a Tax Bracket?
A tax bracket is a range of income that is subject to a specific income tax rate. In the United States, the federal income tax system is progressive, meaning that as your income increases and crosses into higher tax brackets, only the income within that specific bracket is taxed at the higher rate.
How Tax Brackets Actually Work
A very common myth is that getting a raise that pushes you into a higher tax bracket will result in a lower take- pay. This is mathematically impossible. The IRS publishes updated tax bracket thresholds each year, adjusted for inflation.
When you enter a higher tax bracket, you do not pay that higher tax rate on your entire income. You only pay the higher rate on the money that falls inside that specific bracket.
The Bucket Analogy
Think of tax brackets as a series of buckets. The first bucket holds income up to $11,600 and is taxed at 10%. Once you fill that bucket, the remaining income spills over into the next bucket, which is taxed at 12%. You keep filling buckets until you run out of income.
Marginal Rate vs Effective Rate
- Marginal Tax Rate: This is your highest tax bracket. It is the rate you pay on your last dollar earned. If someone asks what tax bracket you are in, this is the number you give them (e.g., "I'm in the 22% bracket").
- Effective Tax Rate: This is the actual percentage of your total income that you paid in taxes. Because of the "bucket" system, your effective rate is always lower than your marginal rate.
