How Federal Income Tax Brackets Really Work
- Matt Erickson
- 3 days ago
- 3 min read
Updated: 2 days ago
Before we jump into some of the more in-depth tax questions people have, I think it’s important for us to take a step back and make sure we understand the basics correctly. The most common misunderstanding we find when it comes to federal taxes is how the federal income tax brackets really work.
You likely know that federal taxes in the U.S. are progressive, meaning that the tax rate increases as income rises. But what that actually means is not what most people think it means. It has to do with your marginal tax rate and your effective tax rate (which we will distinguish later). Let me explain…
Given the 2025 tax rate tables, or brackets, we know that for married individuals filing joint returns or surviving spouses, the tax rates are as follows:
NOTE: In this blog post, we are not accounting for deductions, tax credits, or any other tax considerations in the interest of keeping things simple to demonstrate how tax brackets work. We are also working in whole numbers, so you will see me round to the nearest whole number for the sake of simplicity. |
The Common Misunderstanding
Based on this table above, many people believe that if a married couple filing jointly makes $50,000 in 2025, their federal income tax rate is 12%. It seems to make sense looking at the chart. But that is incorrect! If it were true, they would owe $6,000 in taxes (12% of $50,000). But, again, it's a common misunderstanding that we need to correct. Keep reading because you’re going to be glad that's not how it actually works. Here’s why…
How Federal Income Tax Brackets Really Work
The way it actually works is that you are taxed at different rates for the income that falls into each bracket. Let's visualize it as individual pots of money for each bracket where Pot 1 represents the income in the first bracket, Pot 2 represents the income in the second bracket, etc.
So, going back to our example, we said that the couple’s income is $50,000. Looking at the brackets, they would have their first pot of money — $23,850 — that is taxed at 10% based on the first bracket. Then, the remaining income (or second pot of money) up to their total of $50,000 would be taxed at 12% based on the second bracket. Here's the visual for that:
The calculations would look like this:
So, for our married couple filing jointly who has a taxable income of $50,000, their total federal income tax would be $5,523. Compared to the common error in calculation I first showed you, the correct calculation is $477 less for our couple. I told you that you would be glad to get the misunderstanding corrected!
Marginal Tax Rate vs Effective Tax Rate
Now that you understand how the brackets work, let’s clarify the marginal tax rate and effective tax rate based on our example couple. This is important because it's what causes the original misunderstanding.
Here's how we define and calculate both of those:
Faster Calculation & A Helpful Visualization
If you are blessed to have an income beyond those first two brackets, you could continue calculating the same way we did in our example above until you reached your income. But, if you want an easier visualization of how to calculate your tax, the IRS has provided tables like the one below. Take a look and then we’ll do another example calculation.
Let’s say couple 2 has $150,000 in taxable income. Using the table above, $150,000 falls into the income parameters of the third tier, so we see it tells us that their tax is $11,157 + 22% of the excess over $96,950. From there, we would calculate as follows:
So for our couple 2 making $150,000 in taxable income, they owe $22,828 total federal income tax. Following the same steps as we did in the first example earlier, we would determine their marginal and effective tax rates like this:
If you would like to see the tax rate tables for others like single filers or married filing separately, the IRS has provided them here starting on page 5. |
I hope you find this explanation helpful as you try to understand how federal tax brackets work. Please remember that we were not accounting for deductions, tax credits, or other considerations today. We were just demonstrating how the progressive income tax works and how to make your own calculations in the simplest of terms.
As always, feel free to email me with your questions.
Wishing you the best,
P.S. In my next blog post, we’ll look at some tax-saving strategies so stay tuned!
