How Federal Tax Brackets Actually Work

The most common misconception about taxes: "If I earn more, I'll move into a higher bracket and lose money." This is wrong. Here's why.

Marginal vs. Flat Tax

The U.S. federal income tax uses a marginal rate system, not a flat tax. This means different portions of your income are taxed at different rates. Only the income within each bracket's range is taxed at that bracket's rate.

Think of it like filling buckets. Your first dollars go into the 10% bucket, then the 12% bucket, then the 22% bucket, and so on. Each bucket has a fixed size. When one fills up, income spills into the next.

Example: $85,000 Income (Single, 2025)

Let's say you're a Single filer with $85,000 in taxable income for 2025. Here's how your tax is actually calculated:

Your marginal rate is 22% — that's the rate on your last dollar of income. But your effective rate is only 16.0%. That's what you actually pay as a percentage of total income.

Why Earning More Never Hurts You

Because only the income above each bracket threshold is taxed at the higher rate, earning $1 more will never result in taking home less money. If you cross from the 22% bracket into the 24% bracket, only the dollars above that threshold are taxed at 24%. Everything below is unchanged.

Taxable Income vs. Gross Income

Tax brackets apply to taxable income, not gross income. Taxable income = gross income minus deductions (standard or itemized). For 2025, the standard deduction is $15,750 for Single filers.

So if you earn $100,000 gross and take the standard deduction, your taxable income is $100,000 - $15,750 = $84,250. That's the number the brackets apply to.

Key Takeaways

• Tax brackets are marginal — each rate only applies to income within that range
• Your effective rate (total tax / total income) is always lower than your marginal rate
• Earning more money never results in a net loss — the higher rate only applies to the additional income
• Brackets apply to taxable income (after deductions), not gross income
• Bracket thresholds are adjusted annually for inflation