Income tax is progressive: different slices of income are taxed at different rates.
Step 1: Let's Learn
Read it, or press Listen and follow the words.
Only the slice is taxed
Moving into a higher bracket taxes only the income above that threshold, not all of it.
The raise myth
A raise cannot leave you with less take-home. Only the extra dollars face the higher rate.
Marginal rate
The marginal rate is the rate on your next dollar earned. It is the highest bracket you reach.
Effective rate
The effective rate is total tax divided by total income. It is always lower than the marginal rate.
Deductions and credits
A deduction reduces taxable income; a credit reduces the tax itself. A credit is worth more, dollar for dollar.
Brackets apply to slices, not the whole
A higher tax rate applies only to income above the threshold, not to all income. Crossing into a higher bracket raises the tax on the amount above it and leaves the rest taxed as before.
A raise never lowers take-home pay
This follows directly from the slice structure. The widespread belief that a raise can leave someone worse off comes from misunderstanding brackets as applying to total income, and it is simply false.
Marginal against effective rate
The marginal rate applies to the next dollar earned; the effective rate is total tax divided by total income and is always lower. Quoting one when the other is meant is a common source of confusion.
Deductions and credits differ
A deduction reduces the income that is taxed, so its value depends on the marginal rate. A credit reduces the tax directly, so its value is the same for everyone. Credits are generally worth more per unit.
Step 2: Try It Yourself
Tap and try it out.
10% band
20% band
30% band
20% band has the most. It has 2000 more than 10% band.
Step 3: Watch an Example
One step at a time.
Watch Marcus Compute Bracket Tax
Brackets are 10% on the first $10000 and 20% on income above it. Marcus earns $30000.
- Step 1
The first $10000 is taxed at 10%, giving $1000.
Step 4: Your Turn
Practice makes it stick.
The First Band
Problem 1 of 2
10% on the first $10000. Tax on that band, in dollars?
dollars
The Effective Rate
Problem 2 of 2
Tax $5000 on income $30000. Effective rate in percent, to one decimal place?
%
Slice by Slice
1 of 8
20% on $20000 of income. Tax in dollars?
2 of 8
Bands of $1000 and $4000 tax. Total tax in dollars?
3 of 8
Tax $4000 on income $40000. Effective rate in percent?
4 of 8
Income $25000 with 10% on the first 10000 and 20% above. Total tax in dollars?
5 of 8
Can a raise reduce your take-home pay? 1 yes, 0 no.
6 of 8
Which is worth more per dollar? 1 a deduction, 2 a credit.
7 of 8
Match each term with its meaning.
Tap a card on the left to start.
8 of 8
Tax $9000 on income $60000. Effective rate in percent?
Step 5: Quick Check
Show what you know.
Question 1 of 2
Tax $3000 on income $30000. Effective rate in percent?
Question 2 of 2
What happens when you move into a higher tax bracket?
What You Learned
- Income tax is progressive: each slice of income has its own rate.
- The marginal rate applies to the next dollar; the effective rate is the average.
- A raise always increases take-home pay.