Most Americans believe earning more money automatically means they’ll “jump into a higher tax bracket” and take home less pay. It’s one of the most common misunderstandings about taxes—and it causes a lot of unnecessary stress.
It’s easy to see why. Tax talk can sound intimidating, and when you hear phrases like “moving up a bracket,” it feels like crossing a line that could cost you. You work hard for every dollar, so the idea that a small raise or extra sale could somehow make you poorer feels unfair and confusing.
The truth is, tax brackets are not cliffs. They’re steps. When you move into a higher bracket, you don’t pay the new rate on all your income. You only pay that higher rate on the next portion you earn.
Below, we’ll walk you through understanding how the tax system really works, why you never lose money by earning more, and how knowing your bracket can help you make smarter financial decisions.
This misconception pops up every year when raises, bonuses, or big sales come in. Someone will say, “If I make a few thousand more, I’ll move into a higher tax bracket and end up with less money.”
That’s not how it works.
U.S. federal income taxes use a marginal tax structure, which means your income is taxed in segments. Each portion of what you earn is taxed at the rate assigned to that specific bracket. Only the dollars that fall above a bracket threshold are taxed at the higher rate — not your whole income.
Think of it as stacking layers: lower layers of your income are taxed at lower rates, and only the portion that reaches the next layer is taxed at the higher rate. The confusion happens when people assume their entire income shifts to that top rate, when in reality, only the small portion that crosses into the next bracket does.
The U.S. follows a progressive tax system, which divides your income into ranges called tax brackets, and taxes each range at a different rate.
Here’s how it works:
Think of it like climbing a staircase. Each step represents a tax bracket. You pay a bit more on each new step, but you still keep most of what you earn.
This structure means people who earn more pay a higher rate on their top dollars, but their entire income never gets taxed at the highest rate they reach.
Key takeaway: Your income fills up each tax bracket one layer at a time, not all at once.
Let’s make this easier to picture.
Imagine your income is a pitcher filled with water—say, $115,000 worth of water. The IRS gives you several cups, each representing a different tax bracket. You start pouring your income into the cups in order:
As you pour from your pitcher, Cup A fills first. When it’s full, you move on to Cup B, and then Cup C. Each cup of income gets taxed at its own rate.
If you earn $115,000, your pitcher never fills the top cup completely. That means most of your income is still taxed at the lower 10% and 12% rates. Only the portion that lands in Cup C—those last few thousand dollars—is taxed at 18%.
Even though you fall into the “18% bracket,” you don’t pay 18% on all your income. Your overall or effective rate—the average rate across all cups—is much lower.
This “cup” idea helps you see why earning more can never make you poorer. You’ll always take home more after taxes because only a small slice of your income gets the higher rate.
When people talk about tax brackets, they often mix up two terms: marginal tax rate and effective tax rate.
Your marginal rate is the rate on your next dollar of income. It’s the highest bracket you’ve reached.
Your effective rate is your average tax rate—the total amount you pay in tax divided by your total taxable income.
Here’s an example:
|
Tax Rate |
What It Means |
Example (Income = $100,000) |
|
Marginal Tax Rate |
The rate on your next dollar of income |
22% – the rate for income above $95,375 |
|
Effective Tax Rate |
Your average tax rate across all brackets |
14% – $14,000 total tax ÷ $100,000 income |
|
Why It Matters |
Helps you understand how new income, bonuses, or expenses affect your taxes |
Knowing this helps you plan the timing of income and spending |
These two numbers tell different stories. Your marginal rate helps you see how future income, like bonuses or new profits, will be taxed. Your effective rate shows what you actually pay on average.
Both rates can be helpful, but for making smart financial choices, the marginal rate usually matters most.
Knowing how tax brackets work can change how you think about money decisions. It helps small business owners, professionals, and employees make clearer choices about income, bonuses, and year-end spending.
If you own a business, you can decide when to make certain purchases. Maybe you want to buy new equipment or prepay some expenses. Understanding your current and future tax brackets can help you decide when to spend to maximize the impact.
For instance, if you expect next year to be much more profitable, waiting to make a large deductible purchase could save you more. Spending that same dollar in a higher bracket reduces more of your taxable income.
If you give bonuses to yourself or your employees, timing matters. When you understand your brackets, you can calculate how much those bonuses will really cost after taxes—and make better decisions about when to pay them.
Many business owners feel blindsided at income tax time because they don’t realize how much of their income falls into each bracket. Understanding your brackets helps you estimate your taxes during the year so you stay prepared when payments are due.
Some business owners hesitate to grow because they worry about “getting pushed into a higher bracket.” That mindset holds them back. Once you understand how brackets actually work, you’ll see that growth always helps you move forward, never backward.
Earning more may slightly increase your taxes, but it also increases your take-home pay.
You don’t need to be a CPA to understand your bracket. You just need a few simple tools and a little math.
Go to the IRS website or a trusted financial site that lists current tax brackets. Look for the table that matches your filing status—single, married filing jointly, head of household, or married filing separately.
This isn’t your total income. It’s what’s left after deductions like the standard deduction, business deductions, and certain credits. These deductions lower your taxable income and can keep you in a lower bracket.
Using the table, note how much of your income falls into each range. You can even set up a quick spreadsheet:
Online calculators can do this too, but doing it once by hand makes it “click.” You’ll see exactly how each portion of income fills up the brackets.
If you’re expecting a raise or bonus, check what bracket your next dollar will fall into. Knowing your marginal rate helps you estimate how much of that new money you’ll actually keep.
Even with this knowledge, a few myths keep coming back year after year. Let’s clear them up:
False. Every extra dollar you earn still adds to your income after taxes. You can’t make more money and end up with less.
False. Only the income that falls within your top bracket gets taxed at that rate. The rest gets taxed at lower rates.
False. Moving into a higher bracket means you’re earning more. That’s a good thing. It might increase your total tax bill a little, but it always increases your total income even more.
False. The system can be complex, but it’s consistent. Once you understand how it works, you can make it work for you—especially when you get expert guidance on timing income and expenses.
A higher tax bracket doesn’t take money out of your pocket—it just means the next portion of your income gets taxed at a slightly higher rate. Think of your income like water filling cups: each cup represents a bracket with its own limit and rate. Once you see it this way, taxes start to make sense.
Understanding how brackets work helps you decide when to spend, save, or reinvest in your business. It gives you confidence to grow without fear of “losing” money to taxes.
At TMA Accounting, we help small business owners cut through the confusion so they can make smart, informed choices all year long. If you want clarity about where your income falls and how to stay ahead at tax time, we’re here to help.
Let’s make your tax situation as clear as your goals. Book a call and let's talk today!
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