Tax brackets are an essential part of the U.S. tax system, but they’re often misunderstood. These misconceptions could lead to money left on the table and tax dollars overpaid for DIY tax preparers. Here’s how they really work:
Marginal Tax Brackets
The U.S. uses a progressive tax system, which means your income is divided into portions, and each portion is taxed at a specific rate. Contrary to popular belief, earning more money doesn’t mean all your income is taxed at a higher rate—only the amount that falls within each bracket is taxed at that rate.
Let’s look at an example for a single filer in 2024 who earns $50,000:
- The first $11,000 is taxed at 10% = $1,100.
- The portion from $11,001 to $44,725 is taxed at 12% = $4,047.
- The portion from $44,726 to $50,000 is taxed at 22% = $1,159.
So, the total tax owed is $6,306, not 22% of $50,000. This misunderstanding often causes unnecessary fear about moving into a higher tax bracket.
Why It Matters:
Understanding tax brackets can help you make smarter financial decisions. For example, contributing to a retirement account can reduce your taxable income and potentially push you into a lower bracket, saving you money.
Takeaway:
Your entire income isn’t taxed at the same rate, only the portion that falls within each bracket. A higher income might increase your tax rate, but you still take home more money overall.
If you’re still unsure what this tax season will hold for you, contact us today to learn how we can help you navigate the complexities of tax planning and preparation. Schedule your consultation now to take control of your financial future!