Understanding Tax Brackets

A common misconception regarding taxes is that a 40% tax rate means that you will pay 40% of your taxable income in taxes. In fact, the United States has a graduated income tax system, which means that your top, or marginal, tax rate only applies to the income in that bracket. For example, many people believe that a 24% tax rate on $100,000 of taxable income would equal $24,000 in taxes. In fact, the 24% would only apply to the last $5,000 of income. The first $11,000 of income would be taxed at 0%; the next $33,000 of income would be taxed at 12%; and the next $50,000 would be taxed at 22%. This would equal approximately $17,000 in taxes. The effective rate, which is the average rate you pay, is 17% even though the marginal rate is 24%. Please note the figures in this episode are based on single filing for the tax year 2022 and are for illustrative purposes only.