Why You Shouldn’t Fear Higher Tax Brackets

When tax brackets are shown in news reports, they often come with a gasp of fear. A high tax bracket is shown, and it’s pointed out that people with a certain income will be in that tax bracket, leaving the implication that someone making a good income will have to pay a huge amount of their income in taxes.

That’s a very misleading thing to present, for two reasons. First, a significant portion of your income is never taxed at all. Virtually everyone is eligible for some tax deductions — even if you don’t have many, you’ll still get the standard deduction, which means that some of your income is never taxed at all.

The other reason is that high tax brackets only affect a portion of your income, the amount that’s over that threshold. If you see an example “tax bracket” where people with incomes over $400,000 a year are in the 50% tax bracket, that only affects the extra money they make beyond $400,000 a year. The first $400,000 are taxed a lot less than you might think.

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In this article

    The basics of filing your income taxes

    For most workers, when you receive your paycheck, you’ll notice that your employer has kept a portion of your pay for your income taxes. They send that money to the IRS.

    [ More: How to Navigate Taxes as a Freelancer ]

    Then, each year, you file your income taxes with the IRS, and that process determines how much you owe. It’s based on your income, as well as things like how many dependents you have. You can file your taxes yourself (by using tax software, and there are some free tax software packages that work for simple returns), or you can pay a tax specialist like H&R Block to do it for you, and they even offer no-contact tax filing that respects social distancing.

    The IRS uses the money already set aside for you by your employer to pay that tax bill, then sends you the rest in the form of a tax refund. The sooner you file, the sooner you get that refund, of course, but the deadline for filing is April 15. 

    The big question, of course, is how much of your income you’ll be paying in taxes, and that’s how tax brackets come in. They tell you the amount of federal income taxes you’ll owe. 

    How do tax brackets actually work?

    Tax brackets divide your income up into small slices. In each of those slices, you have to pay a certain percentage of that slice in income taxes. Let’s look at the current tax brackets for an example.

    [ Next: How to Get a Tax Extension ]

    2021 income tax brackets

    BracketTaxpayers Filing SingleMarried taxpayers Filing Jointly
    10%Up to $9,950Up to $19,900
    12%$9,951–$40,525$19,901–$81,050
    22%$40,526–$86,375$81,051–$172,750
    24%$86,376–$164,925$172,751–$329,850
    32%$164,926–$209,425$329,851–$418,850
    35%Over $209,425Over $418,850

    Source: Internal Revenue Service

    An example of how tax brackets work

    Let’s say single-filer Johnny makes $120,000, but after deductions, his taxable income is $100,000. His income is then sliced up into the various tax brackets.

    • The first $9,950 of his income goes into the 10% bracket, and thus he owes $995 on that portion of his income.
    • The next $30,575 of his income goes into the 12% bracket, and thus he owes $3,669 on that portion of his income.
    • The next $45,850 of his income goes into the 22% bracket, and thus he owes $10,087 on that portion of his income.
    • The remaining $13,625 of his income goes into the 24% bracket, and thus he owes $3,270 on that portion of his income.

    Overall, he pays $18,021 in income taxes, or just a bit over 15% of his total income. Although he’s in the 24% tax bracket, he’s only paying 15% of his income in taxes.

    What happens when you move up a tax bracket?

    What happens to a person’s taxes if they move up a tax bracket? This is often presented as a disastrous scenario on news programs, but it’s really not that big of a deal. 

    Let’s say Jill files as a single person, earns $40,000 a year, but after deductions, her taxable income is $30,000.

    [ Read: Here’s How 2021 Tax Brackets Work ]

    The first $9,950 of her income goes into the 10% bracket, and thus she owes $995 on that portion of her income.

    The remaining $20,050 of her income goes into the 12% bracket, and thus she owes $2,406 on that portion of her income.

    She owes a total of $3,401 in income taxes, which is only 8.5% of her total income. She’s in the 12% tax bracket, but only paying 8.5% of her income in taxes. She’s keeping $36,599 of her $40,000 income.

    Now, let’s say Jill is an awesome worker and her pay gets doubled. She’s now earning $80,000 a year, and $70,000 of it is taxable.

    • The first $9,950 of her income goes into the 10% bracket, and thus she owes $995 on that portion of her income.
    • The next $30,575 of her income goes into the 12% bracket, and thus she owes $3,669 on that portion of her income.
    • The remaining $29,475 of her income goes into the 22% bracket, and thus she owes $6,485 on that portion of her income.

    In all, she now owes a total of $11,149 in income taxes on her $80,000 salary, or an overall 14% tax rate. She’s in the 22% tax bracket now, but the only thing that changed is that some of her big raise is taxed at 12% and the remaining portion of her big raise is taxed at 22%. She’s keeping $68,851 of her $80,000 salary, and pocketing $32,252 of her $40,000 raise — more than 80% of her raise stays with her, even though she went to a higher tax bracket.

    Should I be afraid of moving to a higher tax bracket?

    Absolutely not. When you move into a higher tax bracket, all that it means is that your additional income will be taxed at a slightly higher rate than before. The rest of your income continues to be taxed at the lower rate it always has been.

    You want to get every dime of income you can because the vast majority of it will stay in your pockets, even if you go into a higher tax bracket. All the higher tax bracket means is that you’re now earning so much, a bit of your income is now taxed at a higher rate than before. You earn more, you keep more, regardless of what tax bracket you’re in.

    We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

    Trent Hamm

    Founder & Columnist

    Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

    Reviewed by

    • Courtney Mihocik
      Courtney Mihocik
      Loans Editor

      Courtney Mihocik is an editor at The Simple Dollar who specializes in personal loans, student loans, auto loans, and debt consolidation loans. She is a former writer and contributing editor to Interest.com, PersonalLoans.org, and elsewhere.