Many people fear that winning a raise will catapult them into a higher tax bracket, and they'll wind up worse off than they were before. But this is a somewhat misguided notion about how the progressive federal income tax system used in the U.S. works. While those who receive salary increases are indeed taxed at higher rates, only the added income is vulnerable to the increased rates.
- The more you earn, the more taxes you pay—but the U.S. progressive federal income tax system lessens the bite somewhat.
- Since the system levies different tax rates on different portions of an individual's income, your entire income won't be subject to a higher tax bracket when you get a raise.
- Even if your pay raise has bumped you into a higher nominal tax bracket, your effective tax rate would only increase by a few percentage points.
How to Calculate How Much Tax You Owe
The more you earn, the more taxes you pay. But the progressively higher tax rate takes some of the sting out of pulling in more cash. The tax tables below show the rates the Internal Revenue Service (IRS) imposes on income for the tax year 2021 (which come due in April 2022):
|Tax Brackets, 2021|
|2021 Rate||Married Joint Return||Single Individual||Head of Household||Married Separate Return|
|10%||$19,900 or less||$9,950 or less||$14,200 or less||$9,950 or less|
|12%||$19,901 to $81,050||$9,951 to $40,525||$14,201 to $54,200||$9,951 to $40,525|
|22%||$81,051 to $172,750||$40,526 to $86,375||$54,201 to $86,350||$40,526 to $86,375|
|24%||$172,751 to $329,850||$86,376 to $164,925||$86,351 to $164,900||$86,376 to $164,925|
|32%||$329,851 to $418,850||$164,926 to $209,425||$164,901 to $209,400||$164,926 to $209,425|
|35%||$418,851 to $628,300||$209,426 to $523,600||$209,401 to $523,600||$209,426 to $314,150|
|37%||Over $628,300||Over $523,600||Over $523,600||Over $314,150|
Your marginal tax rate is the rate of tax that applies to each additional dollar of income earned. If you're single and earned $39,475 that year, you are in the 12% marginal tax bracket. Your tax liability for 2021 was $995 (10% of $9,950) plus 12% of the amount of your earnings over $9,950—which is $29,525. So, you owe $995 plus 12% of $29,525, which is $3,543. Your total tax for 2020 is $4,538.
While your marginal tax rate was 12%, your effective tax rate, or the average rate of tax you paid on your total income, was lower. To calculate your effective tax rate, divide your total tax by your total income. In this case, $4,538/39,475 gives you an effective tax rate of 11.5%.
Now, let's see what happens to your tax liability if you got a $10,000 raise that elevated your annual income for 2021 to $49,475. You already know that you owe $4,538 on the first $39,475 you earned. But now that your total income falls between $40,526 and $86,375, your $10,000 raise bumps you into the 22% tax bracket. Fortunately, that 22% rate only applies to your $10,000 additional income. For that, you would owe an extra $2,200 a year in tax, for a total tax bill of $6,738 ($4,538 + $2,200).
To determine your overall tax rate for your $49,475 salary, simply divide your total tax ($6,738) by your total income ($49,475) to reveal an effective tax rate of 13.6%, not 22%.
Changes for Tax Year 2022
The tax tables are updated annually by the IRS. For the tax year 2022, the income ranges are adjusted as follows.
|Tax Brackets, 2022|
|2022 Rate||Married Joint Return||Single Individual||Head of Household||Married Separate Return|
|10%||$20,550 or less||$10,275 or less||$14,650 or less||$10,275 or less|
|12%||$$20,551 to $83,550||$10,276 to $41,775||$14,651 to $55,900||$10,276 to $41,775|
|22%||$83,551 to $178,150||$41,776 to $89,075||$55,901 to $89,050||$41,776 to $89,075|
|24%||$178,151 to $340,100||$89,076 to $170,050||$89,051 to $170,050||$89,076 to $170,050|
|32%||$340,101 to $431,900||$170,051 to $215,950||$170,051 to $215,950||$170,051 to $219,950|
|35%||$431,901 to $647,850||$215,951 to $539,900||$215,951 to $539,900||$215,951 to $323,925|
|37%||Over $647,850||Over $539,900||Over $539,900||Over $323,925|
Deductions and Credits
The aforementioned example doesn't account for the deductions and credits that may potentially reduce your taxable income. Every taxpayer can choose whether to take a standard deduction or itemize deductions.
Single individuals who don't own their own homes probably don't have many deductions to itemize, so a standard deduction makes more sense. In fact, most Americans now use the standard deduction since it nearly doubled in size in 2018.
Instead of paying tax on all $49,475 that you earn, you'll pay tax on that amount minus the standard deduction. For the tax year 2021, the standard deduction for single filers is $12,550, reducing your taxable income to $36,925. For the tax year 2022, the deduction for single filers rises to $12,950.
The Bottom Line
The progressive tax system is designed to levy different tax rates on different portions of an individual's income, imposing the higher rate only on the income above a certain level. Your entire income won't be subject to a higher tax bracket, in other words. All in all, a raise is a cause for celebration and not a source of angst.
Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2021."
Internal Revenue Service. "2022 Form W-4S," Page 2.
Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2022."