What they don’t teach you in school
In this article, I am talking about how the Federal Tax System of the United States works.
I wish I would have learned the following in school. I feel like financial education is really important but, for some reason, the educational system doesn’t seem to be on the same wavelength. They want us to learn that mitochondria is the powerhouse of the cell instead.
Here are the different federal tax rates in the United States.
Note: there is a total of 7 different tax rates.
Let us say that I am making $100,000 a year. That means that I am in the 24% tax bracket. Does that mean that my whole salary is going to be taxed at a rate of 24%? Does that mean that I am going to be paying $24000 in taxes annually?
The answer is no.
It is important to understand that Federal Tax Rates are marginal and not flat.
That means that my salary is going to be divided among all of the brackets below. Imagine that the different brackets are like bags that you got to fill.
The first bag, which is taxed at a rate of 10%, can only contain $9,875.
The second bag, which is taxed at a rate of 12%, can only contain $30,250.
The third bag, which is taxed at a rate of 22%, can only contain $45,399.
The fourth bag, which is taxed at a rate of 24%, can only contain $77,774.
And so on…
With a salary of $100,000 a year, I am going to fill the first three bags and there is going to be $14,476 in the fourth bag.
That means that $9,875 is going to be taxed at a 10% rate, $30,250 is going to be taxed at a 12% rate, etc.
The sum of the money in all the bags equals $100,000.
The sum of the amount of tax paid equals $18,079.52.
If we subtract the amount of money that we owe to the government, that leaves us with $81920.48.
Notice how it is way more than the initial $76,000 that we were working with at the beginning of this article. There is a difference of exactly $5,920.48.
A thing to note is that getting a raise is always a good thing. You don’t have to worry about falling in the next bracket.
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