Many individuals are concerned that receiving a raise would push them into a higher tax rate, leaving them worse off than they were before. However, this is a slightly erroneous understanding of how the United States’ progressive federal income tax system operates. While people who earn wage increases are taxed at higher rates, only the additional income is subject to the higher rates.
- The more you make, the more taxes you pay—but the progressive federal income tax system in the United States softens the blow considerably.
- Because the system imposes separate tax rates on different components of an individual’s income, when you earn a raise, your whole income will not be subject to a higher tax bracket.
- Even if your raise moved you into a higher nominal tax band, your effective tax rate would only rise by a few percentage points.
How to Calculate How Much Tax You Owe
The more money you make, the more taxes you have to pay. However, the steadily rising tax rate softens the blow of bringing in more money. The tax tables below indicate the rates imposed by the Internal Revenue Service (IRS) on income for the tax year 2021 (due in April 2022):
|Tax Brackets, 2021|
|2021 Rate||Married Joint Return||Single Individual||Head of Household||Married Separate Return|
|10%||$19,900 or less||$9,950 or less||$14,200 or less||$9,950 or less|
|12%||$19,901 to $81,050||$9,951 to $40,525||$14,201 to $54,200||$9,951 to $40,525|
|22%||$81,051 to $172,750||$40,526 to $86,375||$54,201 to $86,350||$40,526 to $86,375|
|24%||$172,751 to $329,850||$86,376 to $164,925||$86,351 to $164,900||$86,376 to $164,925|
|32%||$329,851 to $418,850||$164,926 to $209,425||$164,901 to $209,400||$164,926 to $209,425|
|35%||$418,851 to $628,300||$209,426 to $523,600||$209,401 to $523,600||$209,426 to $314,150|
|37%||Over $628,300||Over $523,600||Over $523,600||Over $314,150|
The marginal tax rate is the tax rate that is applied to each extra dollar of income produced. You are in the 12% marginal tax rate if you are single and earn $39,475 that year. Your tax burden for 2021 was $995 (10% of $9,950) plus 12% of your profits over $9,950—a total of $29,525. So you owe $995 + 12% of $295, for a total of $3,543. In 2020, your total tax is $4,538.
While your marginal tax rate was 12%, your effective tax rate was lower, or the average rate of tax you paid on your entire income. Divide your total tax by your total income to get your effective tax rate. In this scenario, $4,538/39,475 is an 11.5% effective tax rate.
Now consider what would happen to your tax obligation if you received a $10,000 increase, bringing your yearly income for 2021 to $49,475. You are already aware that you owe $4,538 on your first $39,475 earned. However, since your total income is now between $40,526 and $86,375, your $10,000 rise places you in the 22% tax bracket. Fortunately, the 22% rate only applies to your extra $10,000. You would owe an additional $2,200 in taxes every year, for a total tax bill of $6,738 ($4,538 + $2,200).
Simply divide your total tax ($6,738) by your total income ($49,475) to get an effective tax rate of 13.6%, not 22%, for your $49,475 pay.
Changes for Tax Year 2022
The IRS updates the tax tables once a year. The income ranges for tax year 2022 have been changed as follows.
|Tax Brackets, 2022|
|2022 Rate||Married Joint Return||Single Individual||Head of Household||Married Separate Return|
|10%||$20,550 or less||$10,275 or less||$14,650 or less||$10,275 or less|
|12%||$$20,551 to $83,550||$10,276 to $41,775||$14,651 to $55,900||$10,276 to $41,775|
|22%||$83,551 to $178,150||$41,776 to $89,075||$55,901 to $89,050||$41,776 to $89,075|
|24%||$178,151 to $340,100||$89,076 to $170,050||$89,051 to $170,050||$89,076 to $170,050|
|32%||$340,101 to $431,900||$170,051 to $215,950||$170,051 to $215,950||$170,051 to $219,950|
|35%||$431,901 to $647,850||$215,951 to $539,900||$215,951 to $539,900||$215,951 to $323,925|
|37%||Over $647,850||Over $539,900||Over $539,900||Over $323,925|
Deductions and Credits
The above example does not take into account the deductions and credits that may lower your taxable income. Every taxpayer has the option of taking the standard deduction or itemizing deductions.
Single people who don’t own their own houses are unlikely to have many itemized deductions, therefore a standard deduction makes more sense. In fact, since it almost doubled in size in 2018, the standard deduction is currently used by the majority of Americans.
Instead of paying tax on the whole $49,475 you earn, you will pay tax on the amount less the standard deduction. The standard deduction for single filers in 2021 is $12,550, lowering your taxable income to $36,925. The deduction for single taxpayers increases to $12,950 in 2022.
The Bottom Line
The progressive tax system is intended to charge various tax rates on different segments of an individual’s income, with the higher rate imposed solely on income beyond a specified threshold. In other words, your total income will not be subject to a higher tax rate. Overall, a raise is a reason to rejoice rather than be concerned.
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