In our last installment, we covered the difference between standard and itemized deductions. This week, we’re diving into a topic that often causes confusion—marginal tax brackets.
Many people think that when their income pushes them into a higher tax bracket, all of their income is taxed at that higher rate. This isn’t the case. Let’s clarify how marginal tax brackets actually work.
What Are Marginal Tax Brackets?
The U.S. federal income tax system is progressive. This means that your income is divided into chunks, with each chunk taxed at a different rate. These chunks are what we refer to as tax brackets.
For example, in 2024, the tax brackets for a single filer are:
10% on income up to $11,000
12% on income between $11,001 and $44,725
22% on income between $44,726 and $95,375
24% on income between $95,376 and $182,100
32% on income between $182,101 and $231,250
35% on income between $231,251 and $578,125
37% on income over $578,125
How It Works
Let’s say your taxable income is $50,000. Here’s how your tax would be calculated:
The first $11,000 is taxed at 10%, so you pay $1,100.
The next $33,725 ($44,725 - $11,000) is taxed at 12%, so you pay $4,047.
The last $5,275 ($50,000 - $44,725) is taxed at 22%, so you pay $1,160.50.
Your total tax bill would be $1,100 + $4,047 + $1,160.50 = $6,307.50.
Notice how only the portion of your income that falls within each bracket is taxed at that bracket’s rate. Even though your highest bracket is 22%, not all of your income is taxed at 22%—just the portion over $44,725.
Why This Matters
Understanding marginal tax brackets can help you make better financial decisions. For example, knowing how much of your income will be taxed at a higher rate can help you plan for year-end tax strategies, like contributing more to retirement accounts or making charitable donations.
Next time you hear that you’re moving into a higher tax bracket, remember: only the income that falls within that new bracket is taxed at the higher rate. The rest is taxed at the lower rates of the previous brackets.
In our next installment, we’ll discuss the difference between tax credits and tax deductions and how they impact your tax bill. Stay tuned!
If you have any questions, please do not hesitate to contact TrueBlaze Advisors.
Read more articles from this series here:
Understanding Standard vs. Itemized Deductions
Understanding Use Tax: What it is and Why it Matters to Your Business