Expected Time: 10 minutes
What You’ll Need:
💻 Computer with access to your company W2 platform
📝 Money Journal and Pen
Why It’s Important
Tax brackets can seem complicated, but when you understand how they work, you’ll have a clearer sense of what you are actually paying in taxes.
The information below is meant for educational purposes only, and cannot be considered investment advice. Consult with tax professional for questions on your specific situation.
Your tax bracket is used to calculate the marginal and the effective tax rate based on your income.
Taxes are applied to portions of your income differently. While the marginal tax rate is the rate of tax applied to the top dollar of your earnings, the effective tax rate is calculated by applying all applicable marginal tax rates to each subset of earnings within your salary.
Here’s an example:
For someone who earns $100,000 annually (and for the sake of example we’ll assume has no deductions to reduce taxable income), the marginal tax rate is 24% for 2022, applied to the top dollar of earnings. The effective tax rate is 17.8%, calculated by applying marginal rates to the appropriate subsets of earnings, as shown below:
Your tax bracket will change almost every year depending on your salary and life events. Follow these steps to stay up to date:
✅ Look up your annual income to see which federal income tax bracket applies to you. Include salary plus bonuses.
✅ Calculate your effective tax rate as shown in the example above.
✅ Look up your annual income for your state income tax rate.
✅ Add these two together to get your total effective tax rate before deductions.
What is your effective tax rate compared to your marginal tax rate? Is it what you expected?
Now that you know all about your tax bracket, move on to check on what you are withholding from your paycheck.