What is a tax bracket
A tax bracket is how the government puts people into groups based on how much money they make. The more money you make, the higher “bracket” you are in. And the higher your bracket, the more taxes you have to pay on the money you make.
How Tax Brackets Work
Let’s say there are three tax brackets:
- 10% for people who make $0 to $10,000
- 20% for people who make $10,001 to $50,000
- 30% for people who make over $50,000
If you make $8,000, you are in the 10% bracket. You pay 10% of your $8,000 in taxes, which is $800.
If you make $40,000, you are in the 20% bracket. But this doesn’t mean you pay 20% on all $40,000. You only pay 20% on the money you make over $10,000. So you pay:
- 10% on the first $10,000 = $1,000
- 20% on the next $30,000 = $6,000 In total, you pay $7,000 in taxes.
The same idea works if you make over $50,000. You pay 10% on the first $10,000, 20% on the next $40,000, and 30% on anything over $50,000.
Why We Have Tax Brackets
Tax brackets are a way to make taxes fair for everyone. People who make more money can afford to pay more in taxes, while people who make less money pay less in taxes. This helps ensure everyone pays what they can based on their earnings.
Some Other Things to Know
- The brackets can change. The government decides the percentages and the dollar amounts for each bracket.
- There are different brackets for taxes, like federal and state taxes.
- The examples here are simple. In real life, taxes can get more complicated, but the main idea of brackets remains the same.
