Progressive Tax Rates

I've had many discussions with people where they indicate that they need to lower their income otherwise their taxes are going to drastically increase.  Sometimes that jump is a large increase (from the 12% tax bracket to the 22% tax bracket or the 24% tax bracket to the 32% tax bracket) while other times it is a small jump (from the 22% tax bracket to the 24% tax bracket or the 32% tax bracket to the 35% tax bracket).  Whether the jump in tax brackets is a small one or a big one, I think we can all agree that nobody wants to pay more in taxes then they actually have to.  However, I think it is important to know that the United States tax brackets are a progressive tax rather than a flat tax.  I'll explain how that works below.

But before I begin, let me show you the tax brackets for 2023 (for a Married Filing Joint tax return):

• 10% for taxable income of $0 - $22,000

• 12% for taxable income of $22,001 - $89,450

• 22% for taxable income of $89,451 - $190,750

• 24% for taxable income of $190,751 - $364,200

• 32% for taxable income of $364,201 - $462,500

• 35% for taxable income of $462,501 - $693,750

• 37% for taxable income over $693,751

Now, pretend there is a married couple that files a joint tax return and their 2023 taxable income is $90,000.  The natural instinct is to find where they fall on the tax bracket table above, see that their tax rate is 22% and do the simple math of $90,000 x 22% = $19,800. Wowzah!

However, the taxes on $90,000 of taxable income is actually much less than that.  Taxes are calculated progressively as you move up the table until you don't have any more income to be taxed.  So, the calculation for that is below.

$22,000 x 10% = $2,200 of taxes ($22,000 taxed and $68,000 remaining to be taxed)

$67,450** x 12% = $8,094 of taxes ($89,450 taxed [$22,000 + $67,450] and $550 remaining to be taxed)

$550 x 22% = $121 of taxes ($90,000 taxed [$22,000 + $67,450 + $550])

Total taxes on $90,000 of taxable income equals $10,415.  That is quite a bit different than the $19,800 calculated previously.  And it's because of that difference that people get so concerned about a change from one tax bracket to the next.  They don't want their taxes to (nearly) double!  And neither would I.

So why is this concept important?  It's good to lower your income for taxes to avoid additional taxes.  But it is important to know how much it is actually saving you.  Your taxes will never (nearly) double just by spilling over into the next tax bracket.  But what it does mean is that your tax savings is much better if you are in a higher tax bracket and you can lower your income by doing something as simple as an IRA contribution or HSA contribution.  If you are saving at a 22% rate rather than a 12% rate then those types of tax savings strategies become a bit more enticing.  

If you have any questions about what your taxes might be on your income please reach out to me or another CPA or tax preparer.  The tax table used in this article was for a married filing joint tax return but there are other tables for singles, married filing separate and head-of-households.  I enjoy helping people understand taxes and would be happy to have a discussion with you.

Note **: $67,450 was calculated by taking the $89,450 income threshold of the 12% tax bracket and subtracting the $22,000 that was already taxed at the 10% tax bracket.

The information in this blog post is for general informational purposes only and is not intended as legal, accounting, or tax advice. Tax laws can change, and the application of information may vary. Readers are strongly advised to consult with their CPA or a qualified tax professional for personalized guidance tailored to their specific situation. This blog post is not a substitute for professional advice, and we disclaim all liability for actions taken based on its content. Always consult a qualified professional for advice on your individual tax situation and business circumstances.