Tax Bracket

Definition

The U.S. tax system is progressive, meaning it has multiple tax brackets. Different portions of your income are taxed at different rates. If you earn $100,000, you don't pay one flat rate on all of it. Instead, the first $11,000 might be taxed at 10%, the next $45,000 at 12%, and the remaining at 22%. Your marginal tax rate is the rate on your highest dollar earned, which is what matters for new income or deductions.

Why it matters

Most people misunderstand tax brackets and think moving into a higher bracket costs them money. That's wrong. Only new income at that bracket's rate is taxed higher. Someone at the edge of the 22% and 24% bracket might delay $10,000 in income, thinking they'll owe more tax. That's not how it works. Knowing your bracket helps with decisions like Roth versus Traditional IRA contributions, timing bonuses, and maximizing deductions. Small adjustments around bracket boundaries can save hundreds annually.

Quick example

You earn $80,000. You're in the 22% tax bracket, but that doesn't mean you pay 22% on all $80,000. You pay 10% on the first $11,000, 12% on the next $45,000, and 22% on the remaining $24,000. Your effective rate is about 15%. A $1,000 bonus gets taxed at your marginal rate of 22%, not 15%. A $1,000 IRA deduction saves you 22%, not 15%.

The bottom line

Knowing what Tax Bracket means helps you make better day-to-day money decisions. It makes rates, account options, and tradeoffs easier to compare.