What Happens When You Go Up a Tax Bracket?

The prospect of moving into a higher tax bracket often causes concern, leading to a common misunderstanding of how taxes are calculated. Many people worry that a raise or bonus will be entirely consumed by a higher tax rate, a fear that stems from a misinterpretation of the United States’ tax system. The federal government uses a system of income tax brackets to determine an individual’s tax liability. This structure means that an increase in income has a specific, and often less dramatic, effect on your overall tax bill than is commonly believed.

Understanding the US Marginal Tax System

The United States employs a progressive, marginal tax system. A frequent myth is that if your income increases and pushes you into a new tax bracket, all of your earnings are suddenly taxed at that new, higher rate. Instead, only the portion of your income that falls within that new bracket is subject to the higher tax rate. The income you earned below that threshold remains taxed at the lower rates.

Think of the tax brackets as a series of buckets. As you earn income, you fill the first bucket, which is taxed at the lowest rate. Once that bucket is full, any additional income spills over into the second bucket, which has a higher tax rate. Only the money that lands in this second bucket is taxed at the higher rate.

This process continues through all seven federal tax brackets, which for 2024 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your marginal tax rate is the rate you pay on your last dollar of income—the rate of the highest bracket your income reaches. The actual percentage of your total income that you pay in taxes is your effective tax rate, which is a blended average of the different rates applied to your income and is always lower than your marginal rate.

Calculating Your Taxable Income

Tax brackets are not applied to your total earnings for the year, known as gross income. They are applied to your taxable income, a lower figure arrived at after taking certain adjustments and deductions. Gross income includes all income from all sources, such as wages, freelance earnings, and investment returns.

From gross income, certain adjustments are subtracted to arrive at your Adjusted Gross Income (AGI). These can include contributions to a traditional Individual Retirement Account (IRA) or student loan interest payments. After calculating your AGI, you can then subtract deductions to determine your taxable income.

Taxpayers have a choice between taking the standard deduction or itemizing deductions. The standard deduction is a fixed dollar amount that you can subtract from your AGI. For 2024, the standard deduction for a single individual is $14,600, and for married couples filing jointly, it is $29,200. This amount is adjusted annually for inflation.

Alternatively, you can itemize deductions if the total of your specific deductible expenses is greater than the standard deduction amount. Common itemized deductions include mortgage interest, state and local taxes (capped at $10,000 per household), and charitable contributions. Deductions lower your taxable income, which can potentially place you in a lower tax bracket or reduce the amount of income taxed at your highest marginal rate.

A Practical Example of Moving Up a Bracket

To see how the marginal tax system works in practice, consider a hypothetical single individual named Sarah with a taxable income of $50,000 in 2024. Her income crosses the threshold between two tax brackets, but her entire income is not taxed at the higher rate.

For the 2024 tax year, the tax brackets for a single filer are structured as follows. The first bracket taxes income up to $11,600 at a 10% rate. The second bracket taxes income from $11,601 to $47,150 at a 12% rate. The third bracket taxes income from $47,151 to $100,525 at a 22% rate.

Sarah’s tax liability is calculated by applying these rates to the segments of her income that fall into each bracket.

• 10% Bracket: The first $11,600 of her income is taxed at 10%, which equals $1,160.
• 12% Bracket: The next portion of her income, from $11,601 up to $47,150, is $35,550. This amount is taxed at 12%, which equals $4,266.
• 22% Bracket: The final portion of her income, from $47,151 up to her total of $50,000, is $2,850. This amount is taxed at her marginal rate of 22%, which equals $627.

To find her total federal income tax for the year, these amounts are added together: $1,160 + $4,266 + $627 = $6,053. Even though Sarah is in the 22% tax bracket, her effective tax rate is only about 12.1% ($6,053 divided by $50,000).

The Role of Filing Status

The income thresholds for each tax bracket are determined by your filing status. The five filing statuses are Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Surviving Spouse. Each status has its own set of income ranges for the tax rates, impacting when an individual moves into a higher tax bracket.

Your filing status is based on your marital and family situation at the end of the tax year. The income brackets for those who are Married Filing Jointly are generally wider than for those filing as Single. This means a married couple can earn more income before their earnings are subject to a higher tax rate compared to a single person.

For example, consider the 2024 tax brackets for the 12% and 22% rates. For a Single filer, the 12% bracket applies to taxable income between $11,601 and $47,150. For those who are Married Filing Jointly, the 12% bracket covers income from $23,201 to $94,300.

This difference means that a single person with a taxable income of $60,000 would have a portion of their income taxed in the 22% bracket. A married couple with the same combined taxable income of $60,000 would remain entirely within the 12% bracket.