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.
How does the math works for the marginal tax brackets?
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%.
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 From | Incomes To | Tax Bracket |
| $0 | $10,000 | 10% |
| $10,001 | $20,000 | 20% |
How does the math works for the marginal tax brackets?
| if you make: | bracket 1 | bracket 2 | your tax is | your 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%.
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