Marginal Tax Rates

I will be giving a financial presentation in early November, so most of my October posts will be devoted to some personal finance topic. Today is:

Marginal Tax Rates - Your Friend is Wrong When They Tell You Your Raise Will Give You Less Net Income

In the United States, we have marginal tax rates for incomes. This means the more you make, the more you pay in taxes. However, if your income increases into a new bracket, only new income past the bracket is taxed at the higher percentage.

For example, assume the following tax brackets.
Incomes FromIncomes ToTax Bracket
$0$10,00010%
$10,001$20,00020%

How does the math works for the marginal tax brackets?
if you make:bracket 1bracket 2your tax isyour net income is
$5,000.00$500.00$0$500.00$4,500.00
$10,000.00$1,000.00$0$1,000.00$9,000.00
$10,001.00$1,000.00$0.20$1,000.20$9,000.80
$15,000.00$1,000.00$1,000.00$2,000.00$13,000.00
$20,000.00$1,000.00$2,000.00$3,000.00$17,000.00

As you can see in red, if you make 1 dollar into the new bracket ($10,001), your net income still goes up. Previously, your dollars were taxed at 10%, but the dollar after $10,000 is taxed at 20%, leaving you with $0.80 instead of $0.90 for your net income. If these made up brackets were real, you'll be in the 20% tax bracket, but only part of the money will be taxed at 20%, and the rest will be 10%.

Comments

Popular posts from this blog

Board games and near the end of the gym challenge

December Challenge has ended!

I'm a hurricane!