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US Tax Brackets: How They Work

My sister, Jenny, who often co-hosts the Adulting Is Easy podcast with me, is almost legally an adult. She has a job. She just took her SAT. She’ll be applying to colleges soon. It’s true when they say kids grow up fast because about five years ago, we had an interaction that went something like this:

Jenny: “What are you doing with Mom?”

Me: “We’re doing my taxes.”

Jenny: “Taxes? Like what you pay when you buy something?”

Me: “I wish that was all the taxes there are. You’ll know the truth soon enough.”

Wouldn’t it be nice for our cash flow if the only taxes we were responsible for paying were sales tax? It makes sense that a pre-teen would think those were the only taxes because when they go to the store to buy something with their own money, they have to pay sales tax. It’s a rude awakening when you realize there are income taxes, payroll taxes, property taxes, estate taxes, gift taxes, etc. Of course, we know the government imposes taxes to fund public services and provide for its citizens, and taxes are therefore necessary.

The next tax most of us are exposed to is income tax. This is true for Jenny, since she just got her first job a few months ago. Income tax is the tax the government imposes on the money we make at our jobs. The amount of income tax Americans are responsible for paying depends on how much they make and what their filing status is.

We have seven tax brackets for ordinary income: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. The brackets are different depending on whether you’re single, head of household, married filing jointly, or married filing separately:

As you can see, the more money Americans make, the more taxes we pay. When I first learned about tax brackets and researched them as a child, I figured you looked up the amount that you made in the tax bracket chart and paid whichever percent that amount said. For example, using the 2020 numbers, I thought if you made $100,000 you paid 24% on $100,000 for a total of $24,000.

Turns out, that is not how it works. The tax rate at each level indicates the taxes that are paid on the amounts in that bracket. Continuing with the $100,000 example and 2020 numbers, the taxes would be 10% on $9,875, plus 12% on $9,876 to $40,125, plus 22% on $40,126 to $85,525, and finally 24% on $85,526 to $100,000. See below:

  • $9,875 x 10% = $987.50

  • ($40,125 - $9,875) x 12% = $30,250 x 12% = $3,630

  • ($85,525 - $40,125) x 22% = $45,400 x 22% = $9,988

  • ($100,000 - $85,525) x 24% = $14,475 x 24% = $3,474

  • Total $18,079.50

  • Effective Tax Rate= $18,079.50/$100,000 = 18%

Let’s do one more example. This time let’s consider the taxes paid on the average salary in the US which was $56,516 in 2017 according to the census bureau.

  • $9,875 x 10% = $987.50

  • ($40,125 - $9,875) x 12% = $30,250 x 12% = $3,630

  • ($56,516 - $40,125) x 22% = $16,391 x 22% = $3,606

  • Total $8,223.50

  • Effective Tax Rate = $8,223.50/$56,516 = 14.6%

The US tax system is set up so that those who make more ordinary income pay more taxes, as you can see from our two examples. In practice, there are many codes and laws that influence how taxes are paid. These are simple examples. In general, though, higher earners pay the most taxes:

Taxes are a complicated subject. There are professionals and advisors who specialize in them. I am not one of them, however, I found US tax brackets to be an interesting topic when I first learned about them, and figured they were worth explaining for my sister and others who might be curious about them.

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