There has been a lot in the news recently about tax brackets – both because it is tax season and because tax policy is back in the news. Confusingly, many of those pieces featured on cable news programs are either factually incorrect or misleading. Which is why this new article from The Simple Dollar is so helpful.
Tax brackets have existed in this country since the early part of last century – as part of what we call progressive taxation, which is how US income tax policy works. Each bracket is a range of income that is taxed at a certain percentage. The number of brackets, the income ranges, and the tax rates have all changed over time.
But the most important thing to realize is that just because you earned a certain amount last year, does not mean all your money is taxed at whatever rate corresponds with that income. Instead, each additional dollar of income you earn is taxed at the rate associated with how much you have earned already. So your first dollar of the year is taxed at the lowest percentage.
For a more detailed explanation, review the article here.