Tax Brackets.
Tax brackets—they sound straightforward, but they’re often misunderstood. Have you ever heard someone say, 'The more you make, the higher you’re taxed'? I bet you have. But here’s the thing: it’s not as simple as it sounds.
In the United States, we use a progressive tax system. While it’s true that your taxes increase as your income rises, the key detail is that the higher tax rate only applies to the portion of your income within that bracket. It’s easier to understand with an example.
Let’s simplify the progressive tax system to make it easier to understand—unlike the IRS, which loves complexity. Imagine Jon Snow opened his Direwolf Security business, earning a taxable income of $35,000 for the year. Using our simplified tax brackets, let’s figure out how much he owes. The easiest way is to break down Jon’s income across each bracket.
Tax Rate | on taxable income from... | up to... |
10% | $0 | $15,000 |
13% | $15,001 | $30,000 |
16% | $30,001 | $45,000 |
Let’s break it down using Jon Snow's Direwolf Security business, where he earned a taxable income of $35,000 for the year. To calculate his taxes, we'll divide his income across the different tax brackets.
Tax Rate | on taxable income from... | up to... | Jon's Taxable Income |
10% | $0 | $15,000 | $15,000 |
13% | $15,001 | $30,000 | $15,000 |
16% | $30,001 | $45,000 | $5,000 |
Total | $35,000 |
Now that we have done that, now its a simple calculation. Jon's Taxable Income in each bracket multiplied by the tax rate for that bracket.
Tax Rate | on taxable income from... | up to... | Jon's Taxable Income | Jon's Taxes Due |
10% | $0 | $15,000 | $15,000 | $1,500 |
13% | $15,001 | $30,000 | $15,000 | $1,950 |
16% | $30,001 | $45,000 | $5,000 | $800 |
Total | $35,000 | $4,250 |
As you can see, while your income may push you into a higher tax bracket, only the income within that bracket is taxed at the higher rate. The rest remains unaffected.
As I mentioned earlier, this was a simplified example. The IRS tax brackets work the same way, but the rates and income levels are different. I have linked the various 2023 income tax brackets below if you want to view the official IRS brackets.
I hope this clears up the mystery of tax brackets! Feel free to reach out if you have any questions—or if Jon Snow’s taxes have you scratching your head!
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