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WalletPrep worksheet · Taxes

How do tax brackets work?

Name ____________________ Date __________

Key ideas

  1. Each rate taxes only its own slice. In the example, Jordan pays 10%, then 12%, then 22% on three slices of her $53,900 taxable income.
  2. Your effective rate is lower than your bracket. Jordan is in the 22% bracket, but her $6,570 of federal income tax is 9.4% of her $70,000 salary.
  3. A raise never lowers your take-home pay. Only the dollars above a bracket line get the higher rate. A $1,000 raise taxed at 22% still leaves $780 more.

Vocabulary

Tax bracket
A range of income taxed at a certain rate. US federal income tax has 7 brackets, from 10% to 37%.
Standard deduction
A flat amount the IRS lets you subtract from your income before tax is figured, if you do not itemize deductions.
401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
Marginal tax rate
The tax rate on your next dollar of income. It is the rate of the highest tax bracket your taxable income reaches.
Inflation
The rise in prices over time, which means each dollar buys a little less each year.
Gross income
Your total pay before any taxes or deductions are taken out. Salary offers and loan applications usually ask for this number.

Work it out

Jordan is single, earns a $70,000 salary, takes the standard deduction and has no pre-tax deductions at work. She wants to know her federal income tax.

  1. Salary
  2. Standard deduction
  3. Taxable income
  4. 10% on the first $12,400
  5. 12% on the next $38,000
  6. 22% on the last $3,500
  7. Federal income tax
  8. Effective rate on salary

Check yourself

  1. Your taxable income moves from just under to just over the top of the 12% bracket. What happens?

    • A. All of your income is now taxed at 22%
    • B. Only the dollars above the line are taxed at 22%
    • C. Your take-home pay goes down
    • D. Nothing changes until next year

  2. You are in the 22% bracket and earn an extra $500 from a side job. How much more federal income tax do you owe on it?

    • A. $50
    • B. $60
    • C. $110
    • D. $500

  3. Which number shows the share of your income that went to federal income tax?

    • A. Your marginal rate
    • B. Your top bracket
    • C. The standard deduction
    • D. Your effective rate

Your turn

Find last year's tax return. Divide the total tax line by your total income to get your effective rate, then look up which bracket your taxable income landed in. Write both numbers down.

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Answer key

How do tax brackets work?

Work it out

  1. Salary$70,000
  2. Standard deduction− $16,100
  3. Taxable income= $53,900
  4. 10% on the first $12,400$1,240
  5. 12% on the next $38,000$4,560
  6. 22% on the last $3,500$770
  7. Federal income tax= $6,570
  8. Effective rate on salary9.39%
  1. Her taxable income is $70,000 − $16,100 = $53,900.
  2. The first $12,400 is taxed at 10%, which is $1,240. The next $38,000, up to $50,400, is taxed at 12%, which is $4,560.
  3. Only the last $3,500 lands in the 22% bracket: $3,500 × 22% = $770. Her total is $1,240 + $4,560 + $770 = $6,570.
  4. Her bracket is 22%, but $6,570 ÷ $70,000 = 9.39% of her salary goes to federal income tax.

Check yourself

  1. B. Only the dollars above the line are taxed at 22% Each rate applies only to the slice of income inside its bracket. The dollars below the line are taxed exactly as before.
  2. C. $110 Extra income is taxed at your marginal rate, the rate on your last dollars: $500 × 22% = $110. You keep $390 before payroll and state taxes.
  3. D. Your effective rate The effective rate is your total tax divided by your income. Your marginal rate only applies to your last dollars.