A tax bracket is a range of income subject to a certain income tax rate. The United States uses a progressive tax system, which means that as your income increases, so does your tax rate.
So, here’s how it goes. Picture your income like a towering skyscraper, right? Now, in this skyscraper, each floor is a different tax bracket. The higher you go, the more you’ve earned, and the higher the tax rate gets.
The first floor? That’s your lowest earnings, which gets taxed at the lowest rate. Let’s say you earn enough to make it to the second floor. You’re moving up in the world, right? Now that second chunk of your income will be taxed slightly higher. And if you’re balling, you keep climbing, each piece of your income getting taxed at a higher rate.
But here’s the key – and this is where many folks get it twisted – moving into a higher tax bracket doesn’t mean all your income gets taxed at that higher rate. Nah, it’s just the cash that falls into that bracket. Each portion of your income is taxed according to the floor it lands on.
Imagine you made it to the penthouse – the top tax bracket. You’re doing alright for yourself! But remember, you had to climb to get there. The money you made on the lower floors – those lower tax brackets – they’re still taxed at the lower rates. Only the cash you made on the penthouse floor is getting hit with the top rate.
It’s like climbing a staircase and paying a toll on each step. The higher the step, the higher the toll. But you’re not returning and paying a higher toll on your climbed steps.
So that’s tax brackets for you. A little bit like an income skyscraper where the tax man’s toll gets steeper the higher you climb. But remember, you’re only paying that steeper toll on the floors you’ve reached. The rest of your cash is chillin’ on the lower floors, being taxed at those lower rates.