The United States has a progressive income tax system. Under this system, taxpayers are placed in specific “brackets” depending on their income, with higher-income households falling into higher brackets. Unfortunately, most taxpayers don’t understand this system, leading to many misconceptions about how income tax actually works. In this blog post, we’ll tackle the biggest misconception about income tax brackets.
What is a tax bracket?
Put simply, the definition of a tax bracket is a range of incomes that are taxed at a certain rate. The tax rate changes above and below this range—lower for lower incomes and higher for higher incomes.
However, this simple definition of a progressive tax doesn’t tell the whole story.
In fact, this progressive tax definition creates a lot of confusion about what it actually means to “move up” into a higher tax bracket. It’s a common misconception that your entire income will be taxed at that higher percentage as soon as you make one dollar over a certain tax bracket. This leads many taxpayers to be worried about getting raises or marrying a partner who also works, fearing that the change in their income tax bracket will lead to them taking home less money.
This is an entirely baseless fear. When your life circumstances change and put you into a higher income tax bracket, only the portion of your income that is actually above the low end of the bracket is taxed.
Now, this doesn’t sound as simple as the above progressive tax definition, so let’s make it easier to understand the meaning of a tax bracket for your finances with an example—and some simple mathematics.
How do tax brackets work?
According to the common misconception about progressive income tax brackets, a married couple making $89,450 (where their highest tax rate is 12%) would take home far more money than if they made $89,451 (where their highest tax rate is 22%).
This doesn’t happen in real life. Let’s take a look at how tax brackets really work for that married couple: When you “move up” a tax bracket, you only pay the increased rate for the money in that bracket. In the prior example, the married couple would pay only the higher 22% tax on the $1.00 over the 12% tax bracket.
Take a look at the federal income tax bracket for a married couple in 2023:
| Rate | Income Brackets | Taxes Owed |
| 10% | $0 to $22,000 | 10% of taxable income |
| 12% | $22,001 to $89,450 | $2,200 plus 12% of the excess over $22,000 |
| 22% | $89,451 to $190,750 | $10,734 plus 22% of the excess over $89,450 |
| 24% | $190,751 to $364,200 | $41,965 plus 24% of the excess over $190,750 |
| 32% | $364,201 to $462,500 | $87,408 plus 32% of the excess over $364,200 |
| 35% | $462,501 to $693,750 | $148,000 plus 35% of the excess over $462,500 |
| 37% | $693,751+ | $242,812.50 plus 39.6% of the excess over $693,750 |
Using these figures, let’s use a married couple making $89,450 as an example to see how progressive income tax brackets work. Again, the misconception is that if you make one dollar more than $89,450, your entire income is then taxed at 22%.
Married couples often apply this flawed logic to explain why one spouse doesn’t work. They assume that if the other spouse works, they’ll just be pushed into a higher tax bracket, rendering any gain in income swallowed up by the increased tax rate.
But that’s not how it works. In this example, if you received a raise to $100,000, you will pay $10,734 plus 22% of the difference between $100,000 and $89,450.
So, if we put our math caps on, you’ll pay $10,734 + [($100,000 – $89,450) x 0.22] in taxes. Breaking those numbers down in brackets equals $18,713.75 + $2,321 = $21,034.75.
To put that number in perspective, you’ll only owe an additional $2,321 in taxes from a raise to $100,000. If your raise to $100,000 were taxed according to the misconception, making $100,000 would result in taking home less money than making $89,450!
Now, that’s a much clearer and more accurate definition of a progressive tax. Unfortunately, this misconception about how income tax works is so widespread. Not only does it result in people being afraid to make more money—which, in our opinion, is definitely not something to be afraid of—but it also makes it easier for taxpayers to be taken advantage of or make poor decisions about their finances.
You want every decision you make about your finances to be in the best interest of you and your household. But in order to do so, you have to understand just how income tax brackets work and what changes when you move from one bracket to another.
Misconceptions about tax brackets, effective tax rates, and other important factors that go into calculating your income tax payments can even land you in trouble with federal and state revenue authorities.
If you’re struggling with tax liabilities and don’t know what to do, call us today at (404) 233-9800 or fill out our online consultation form to schedule a meeting with one of our tax attorneys.