How US federal tax brackets work

Why moving into a higher bracket does not shrink your paycheck, with an invented example and links to the IRS pages for current rates.

A lot of people turn down a raise or extra hours because they think a higher tax bracket will take more than the raise gives them. It does not work that way. This guide explains why, using plain numbers.

The numbers in the examples are invented to show the method. They are not the real rates. For the current brackets and thresholds, use the IRS page on federal income tax rates and brackets.

Brackets are slices, not buckets

US federal income tax is marginal. Your income is cut into slices, and each slice is taxed at its own rate. Only the income inside a slice is taxed at that slice's rate.

Say, purely as an example, that the first $10,000 of taxable income is taxed at 10 percent, and every dollar above that is taxed at 20 percent. You earn $12,000 of taxable income.

The first $10,000 is taxed at 10 percent. That is $1,000.
The remaining $2,000 is taxed at 20 percent. That is $400.
Total tax is $1,400.

You do not pay 20 percent on all $12,000. Your overall rate here is about 11.7 percent, which is called your effective rate. The 20 percent rate is your marginal rate, the rate on your next dollar.

Taxable income is not your salary

The brackets apply to taxable income, not to the figure on your offer letter. Taxable income is what is left after you subtract certain amounts from your gross income. The two main ones for most employees are:

The standard deduction, which most filers take.
Pre-tax contributions, such as traditional 401(k) deferrals or some health plan costs, which come out of your pay before income tax is worked out.

The IRS explains the standard deduction on its page about the standard deduction. The amount depends on your filing status and changes by tax year, so look up the year you are filing for.

Filing status changes the slices

Your filing status decides where each slice starts and ends. The main statuses are single, married filing jointly, married filing separately and head of household. The same income can land in different brackets depending on which status you use. The IRS explains how to pick one in its guidance on filing status.

What happens when a raise crosses a bracket

Go back to the invented example. Your taxable income is $9,500 and a raise brings it to $10,500.

$9,500 was all taxed at 10 percent.
Now the first $10,000 is taxed at 10 percent, which is $1,000.
The extra $500 is taxed at 20 percent, which is $100.

Only the $500 above the line is taxed at the higher rate. Your total tax goes up by a small amount, and your take-home pay still goes up. Crossing into a higher bracket never makes your total pay smaller because of the bracket alone.

Some other things can create the feeling of a cliff. Certain tax credits and deductions phase out as income rises, and that can raise your tax by more than the bracket rate suggests. These effects are separate from the brackets themselves, and the IRS page for each credit explains its own limits.

Federal tax is only part of your paycheck

Your paycheck can show several other lines.

Social Security and Medicare. These are payroll taxes, separate from the income tax brackets. The IRS explains them on its page about Social Security and Medicare withholding rates.
State and local tax. Many states and some cities charge their own income tax. Some states charge none. Check your state's tax agency.
Withholding. Your employer takes tax from each paycheck based on the Form W-4 you filled in. It is an estimate of what you will owe, and your final bill can differ.

Withholding versus what you owe

When you file your return, your actual tax is compared with what was withheld. If too much was withheld, you get a refund. If too little, you owe the difference. A big refund is not a bonus. It means you lent the government money during the year. If you want your paychecks to be closer to your real tax, update your W-4. The IRS offers a Tax Withholding Estimator for this.

A simple way to estimate your own tax

Follow these steps with your own numbers.

Start with your gross income for the year.
Subtract pre-tax deductions, then the standard deduction, to get taxable income.
Look up the brackets for your filing status and tax year on the IRS site.
Tax each slice at its own rate and add the results.
Compare the total with what your employer withheld.

This will be close but not exact. Other income, credits and deductions can change the result.

Check your own paycheck

Try your own salary in the US take-home pay calculator to see federal tax, payroll taxes and take-home pay together. It gives an estimate based on the figures you enter.

Sources

This guide explains general rules. It is not tax advice. Check the IRS for the current year's figures before you file.