How marginal tax rates actually work (it's simpler than you think)
Here's the most important thing to understand: moving into a higher tax bracket doesn't mean all your income gets taxed at that higher rate.
Only the money within each bracket gets taxed at that bracket's rate. Think of it like filling up buckets.
Imagine your income is water, and tax brackets are buckets stacked on top of each other:
🪣 First bucket (10%): Holds the first $11,600
🪣 Second bucket (12%): Holds the next $35,550
🪣 Third bucket (22%): Holds the next $53,375
🪣 And so on...
Your income fills the first bucket completely before spilling into the second bucket, and so on. Each bucket is taxed at its own rate—regardless of how many buckets you fill.
Let's say you're single and have $60,000 in taxable income. Here's how it actually gets taxed:
Even though you're "in the 22% bracket," your effective tax rate is only about 13.8% ($8,253 ÷ $60,000).
Marginal Tax Rate: The rate on your last dollar of income. This is your "tax bracket."
Effective Tax Rate: Your total tax divided by total income. This is what you actually pay as a percentage.
Your effective rate is always lower than your marginal rate because your first dollars are always taxed at the lower rates.
Some people worry that earning more money could actually leave them with less because of higher taxes. This is not how it works.
If you get a raise that pushes you into a higher bracket, only the money above the bracket threshold gets taxed at the higher rate. You'll always take home more money when you earn more money.
Bottom line: Never turn down a raise because you're worried about taxes. More income always means more take-home pay.
Want to see which bracket you're in and calculate your tax?