Everything You Need to Know About Tax Bracketsincome tax | July 05, 2016 | By Susannah McQuitty
I don’t know about you, but when people start talking about tax brackets, I feel like I’m playing a game of monkey-in-the-middle with tax lingo.
Enough is enough: It’s time to figure out what this income tax bracket stuff is all about.
What’s a tax bracket?
A tax bracket tells you the amount of taxes you’ll pay according to your income. Each bracket covers a range of income amounts and applies a base percentage for tax.
For example, if you’re single and make less than $9,275 a year, you are in the 10% tax bracket.
So, if you make $3000 a year, your tax liability is $300; if you make $5,460, it's $546; and if you make $8,355, it's $835.
What does “moving into a higher tax bracket” mean?
If you make more money and reach your bracket’s cutoff point, you’ll move up to the next tax bracket and pay a higher percentage on a portion of your income.
Hang on a second. Why would you want to get a raise if it means you’ll have to pay a higher percent toward your income tax?
Here’s where it gets slightly tricky: Moving up to a new bracket means that you’re actually in two or more tax brackets.
Instead of having a new base percentage to pay, you’ll keep the 10% for the first $9,275 and pay 15% for whatever is left over and within the next highest tax bracket.
Give me an example.
Say you’ve been making $8,000 a year, and since you’re in the lowest tax bracket, your tax rate has been 10%, or $800 in tax liabilty.
Then you get a promotion (yay for you!) and now you’re getting $10,000 a year.
You’re $725 over the $9,275 cutoff point for the lowest tax bracket, so your liability is now 15% of the $725 ($108.75) plus 10% of the $9,275 ($927.50) for a grand total of $1036.25.
You’ll be spending a bit of quality time with your calculator to see how much money will be taxed at which percent, but hey, it’s time well spent.
And that’s it!
Now you can join all those income tax conversations you’ve been missing out on (oh come on, it’s no Christmas morning, but it’s something to celebrate!).
Time to join the adulting game and start catching those overhead tosses!