The Great Tax Bracket Myth: Debunked
One of the most persistent financial misconceptions is the belief that moving into a higher tax bracket will decrease your net income. Under the progressive US income tax system, tax brackets operate like a series of buckets:
When your income spills over from the 12% bucket into the 22% bucket, only the dollars inside the 22% bucket are taxed at 22%. Every dollar in the lower buckets continues to be taxed at 10% and 12%. Therefore, earning more money will always result in higher take-home pay.
Frequently Asked Questions
What is a marginal tax rate?
Your marginal tax rate is the percentage of tax applied to your highest dollar of income. It tells you how much tax you will owe on your next earned dollar.
What is an effective tax rate?
Your effective tax rate is your total tax divided by your total income. It represents the actual blended percentage of your total income paid in tax.