Income Tax

This is a technical explanation of the US (and state) income tax bracket system. A lot of people seem to get confused by it and since I have a huge audience I figured I'd share it with the three of you.

Here is Bob (Hi guys). He makes $100,000 a year (yaaay!) because it makes the math easier (oh). He has to pay income tax on that money (boooo). The fictitious tax bracket system is as follows:

0 to $10,000 - 0%
$10,001 to $50,000 - 10%
$50,001 to $100,000 - 30%
$100,001 and up - 90%

The way this works is that for the first $10k Bob makes he pays 0% tax which totals up to $0. On the next $40k ($10k to $50k) he pays 10% so $4000. On the next $50k ($50k to $100k) he pays 30% which comes out to $15,000. He doesn't make anything above $100k so it doesn't apply. That gives him a total tax bill of $19,000 or an average tax rate of 19%.

Now, a lot of people think that if Bob gets a $1 raise (That's not much) he will have to pay a 90% tax rate or $90k so he is much better off not getting the raise. That is not the case. The tax rate only applies to the money in the range specified. So the 90% tax rate only applies to that $1 above Bob's original $100k salary. Meaning, he will make $0.10 more because of the raise.

A raise is never bad tax wise. You won't ever make less overall. You will make less per dollar earned if you go into a higher bracket, but that's it. I recommend Bob move to a different country though because that tax rate is ridiculous (For sure!).