Marginal Tax Rates

Or Your Friend is Wrong When They Tell You Your Raise Will Give You Less Net Income

In the United States, we have marginal tax rates for incomes. This means the more you make, the more you pay in taxes. However, if your income increases into a new bracket, only new income past the bracket is taxed at the higher percentage.

For Example, assume the following tax brackets.

Incomes From Incomes To Tax Bracket
$0 $10,000 10%
$10,001 $20,000 20%


How does the math works for the marginal tax brackets?

if you make: bracket 1 bracket 2 your tax is your net income is
$5,000.00$500.00$0$500.00$4,500.00
$10,000.00$1,000.00$0$1,000.00$9,000.00
$10,001.00$1,000.00$0.20 $1,000.20$9,000.80
$15,000.00$1,000.00$1,000.00$2,000.00$13,000.00
$20,000.00$1,000.00$2,000.00$3,000.00$17,000.00

As you can see in red, if you make 1 dollar into the new bracket, your net income still goes up. Previously, your dollars were taxed at 10%, but the dollar after $10,000 is taxed at 20%, leaving you with $0.80 instead of $0.90 for your net income.