Understanding Tax Brackets and How They Impact Your Income

Understanding Tax Brackets: Taxes Made Simple

Visualizing taxation for someone that makes $50,000

What Are Tax Brackets?

A tax bracket is a range of income that is taxed at a certain rate. The more you earn, the higher your rate—but here’s the trick: you only pay the higher rate on the money that falls into that bracket, not your entire income.

Think of it like stairs: each step has its own price, and you only pay that price for the step you’re on.

How It Works

Let’s say the tax brackets look like this (for example purposes, not actual 2025 rates):

• 10% on income up to $10,000

• 12% on income from $10,001 to $40,000

• 22% on income from $40,001 to $85,000

  
  

If you earn $50,000, here’s what happens:

1. The first $10,000 is taxed at 10% → $1,000

2. The next $30,000 ($10,001–$40,000) is taxed at 12% → $3,600

3. The remaining $10,000 ($40,001–$50,000) is taxed at 22% → $2,200

Total tax: $1,000 + $3,600 + $2,200 = $6,800

Notice that even though you earned $50,000, you didn’t pay 22% on all of it—only the portion that falls into that bracket.

Why Brackets Matter

Understanding tax brackets helps you:

• Estimate your taxes before filing

• Plan your finances to take advantage of deductions or retirement contributions

• Avoid the misconception that earning more automatically means losing a big chunk of money

  
  

Quick Tip

Tax brackets are marginal, not “all-or-nothing.” That means a raise doesn’t push you into a higher tax rate for everything you earn—just for the portion above the previous bracket.