Income Tax Brackets

A common tax misconception is that your entire income is taxed at the rate of the bracket you fall into. This is not true. The U.S. tax system is progressive; it uses marginal tax rates, meaning income is taxed at different rates depending on income levels.

Think of your gross income as filling a series of buckets*.

• The first $16,100 you make (standard deduction) is tax-free
• Money in Bucket 1 (fills up to $12,400) taxed at 10%
• Money in Bucket 2 (fills up to $38,000) taxed at 12%
• Money in Bucket 3 (fills up to $55,300) taxed at 22%

If you continue earning, this continues until the seventh (highest) tax bracket, which is capped at 37%. You only pay the higher rate on the overflow money that spills into the next bucket.

Imagine you are at the top of the 12% bracket and receive a $1,000 raise that pushes you into the 22% bracket.

Your existing income remains taxed at the lower rates.

Only the extra $1,000 is taxed at 22%.