We are going to simplify marginal income tax brackets. The one thing that we know for a fact is that taxes are complicated, with millions of words in the tax code how could anybody possibly understand it? Well, the good news is you don't have to understand every aspect of taxes but having a good knowledge of marginal tax brackets and how they function can help you pay less in taxes as you manage your different sources of income. 

So, what is a marginal tax bracket? A marginal tax bracket is really the spot that the last dollar of income fell into. So if you took in $59,999 of income, that last dollar that got you to $60,000, how much did that dollar get taxed? That's the topic and the way we're going to break this down today.

Example number one is going to be straight forward, where we assume there is a married filing jointly couple who have earned a total of $60,000 of taxable income.

The first thing we need to take into account is that there is the standard deduction. So at 24,800, which could vary by age, but in this case a 24,800 standard deduction is equivalent to the 0% tax bracket because you don't have to pay income tax on that standard deduction. However, the next $19,750 fall into the 10% tax bracket. So, the tax burden for that piece of your income is $1,975, 10% of the 1970.

But we still have income to bring us up to the total of 60. And the remaining $15,450 will be taxed at 12%. So 12% of that amount is $1,854. And if you add those together you get $3,829 of total estimated federal tax. 

Now, example two we're simply going to double the ordinary taxable income. The standard deduction still applies 24,800. The first marginal tax bracket obviously still applies paying 1975 and taxes, but now we're going to utilize the entire 12% marginal tax bracket because that tax bracket ends at $80,250 of taxable income. So that 12% times that 60,500 gives us $7,260 of additional taxation. But yet there's still a little bit of that 120,000 of income and leaked over into the 22% tax bracket. So, on that $14,950 of tax of income, rather you had to pay $3,289 in taxes because those dollars were taxed at 22%. That brings us to a total estimated federal tax burden of $12,524. 

Take note twice as much income, three times as much in taxes, roughly. So, this does prove that we have a progressive tax system, which means the more you make, the more you're going to pay in taxes. 

I hope that this discussion today on marginal tax brackets clarified for you, the idea that each dollar is not necessarily taxed the same and how that standard deduction fits into that equation as well. But the key takeaway is that by having a good knowledge of marginal tax brackets and how other sources of income are taxed, like Roth and social security and IRA money, you can be strategic about where you draw your money from each year and manage those tax brackets, potentially keeping you from jumping into the next higher tax bracket.

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