The Most Misunderstood Thing About Income TaxesThe Motley Fool #Tax_BracketsJanuary 12, 2019
It’s common to refer to being in a particular tax bracket or paying a certain marginal tax rate, but many completely misunderstand the implications on your overall tax bill that these concepts have.
The U.S. income tax system is a progressive one, which means that low-income taxpayers pay lower rates of tax than high-income taxpayers.
For instance, under current law, taxpayers pay 10% in income tax on a certain amount of income, and then above that, a higher 12% tax rate applies up to a second threshold.
That’s a common misunderstanding, because people get afraid when their income approaches the top of a tax bracket.
Some mistakenly believe that if you earn a single additional dollar that takes you up to the 22% bracket, it’ll cost you an extra 10 percentage points in taxes on every penny of your income.
The reason it’s called a marginal tax rate is that the rate applies only on the margin — that is, to the top dollar of earnings you make.
To see how this works, let’s look at a typical single taxpayer in 2018.
When you look at the 2018 tax brackets , you’ll see that with that income, you’d be in the 12% tax bracket.
Now consider what happens if what many people fear actually happens: a person gets some extra income that pushes them into a higher tax bracket.
As the Fool’s Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com.