Topic 06 · 5 min read
Tax Brackets Made Simple
A raise never costs you money.
The federal system is progressive: income is sliced into bands and each band has its own rate. Moving into a higher bracket only changes the rate on the dollars inside that new band. The dollars below keep their lower rates.
What to know
- Marginal rate
- The rate on your next dollar of income. It is the number that decides what a deduction saves you.
- Effective rate
- Total tax divided by total income. It is always lower than the marginal rate in a progressive system.
- The raise myth
- Crossing a bracket line never reduces take-home pay. Only the amount above the line is taxed at the higher rate.
- Different income, different rates
- Long-term capital gains and qualified dividends use their own lower rate schedule.
- Brackets move
- Bracket thresholds are adjusted for inflation every year, which is why last year's chart is never the right one.
The tax benefit
Knowing your marginal rate turns vague advice into arithmetic: it tells you exactly what a retirement contribution or a deduction is worth to you.
Worked example
Crossing the line
Suppose the 12% band ends at $48,000 and taxable income is $49,000. Only the last $1,000 is taxed at the higher rate. The first $48,000 is untouched by the change.
Watch out for
- Benefit phase-outs, not brackets, are what can make an extra dollar feel expensive.
- State income tax may be flat rather than bracketed.
- Bonus pay is often withheld at a flat rate, which is not the same as being taxed at that rate.
Terms from this topic
Marginal rateEffective rateProgressive taxCapital gain
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