How income tax rates are calculated

picture of income tax statements

Death and taxes, that’s the saying. Unfortunately taxes are one thing you can never (legally) get away from and even though taxes are embedded in our everyday lives, many are still unclear how income tax rates are calculated.

How income tax rates are calculated

Income tax is calculated based on tax brackets, which are ranges of income. Within each of these brackets, taxes are calculated at different percentages. As you exceed an income range (or bracket), up to the next bracket and higher percentage you go.

Here’s an example of the different brackets for a few different countries (click the image to see the original post):

Many believe that come payday, ALL their income is taxed at the highest rate for the income bracket their annual income falls into. ⁣Meaning if you earned $50k in the US, your entire $50k of earnings would be taxed at 22%, but this is not how it works. ⁣

An example

Using the chart above, here’s an example of how income tax would be calculated if you were in the US earning $60,000/year (calculated by @firewithfamily):⁣

  • As per the chart, the first $9,875 of your income is taxed at 10% ($988)
  • From $9,876 up to $40,125, tax is charged at 12% ($3,630)
  • And finally, from $40,126 up to $60,000, at 22% ($4,372)⁣

Had it ALL been taxed at the bracket for $60,000 (22%), you would have been taxed $13,200. But because of tax brackets, you actually pay $8,900 income tax on your $60,000 earnings, a total of 15% when all combined. A big difference.

While you pay more taxes as your income increases, don’t be afraid to increase your earning for fear of the tax man. The increased taxes you’ll pay are offset by your increased earnings, leaving you better off in the long run. So don’t delay! Get out there and earn.

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