If you’re confused as to how tax brackets work, you’re not alone: One in 14 Americans don’t even know what a tax bracket is, NerdWallet found in its 2018 Tax Study.
The U.S. uses a progressive tax system which, in short, means that higher income tax rates generally apply to people with higher incomes.
“Being ‘in’ a tax bracket doesn’t mean you pay that federal income tax rate on everything you make,” NerdWallet notes, giving the example of a single filer with $32,000 in taxable income. That person would be in the 12 percent tax bracket but wouldn’t actually pay 12 percent of the full $32,000. Instead, they pay would 10 percent on the first $9,525 and 12 percent on the rest.
An individual earning $50,000 would pay 10 percent on the first $9,525, 12 percent on the chunk of income between $9,526 and $38,700 and 22 percent on the rest.
“The total bill would be about $6,900,” NerdWallet explains, or “about 14 percent of your taxable income, even though you’re in the 22 percent bracket.”
Note that these are the rules for federal income taxes, NerdWallet adds: “Your state might have different brackets, a flat income tax or no income tax at all.”
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