How does our tax system work?

In the USA, we operate under a Progressive tax system for income. That means that as you make more income, you are taxed at a proportionately higher amount on that income. A couple key terms to remember when thinking about your taxes are the marginal rate you pay and the effective rate you pay. Your marginal tax rate is the tax rate you would pay on the NEXT dollar earned. Your effective tax rate is the total amount of income tax you pay divided by your taxable income. So for example, if you are in the 32% marginal income tax bracket, it would be incorrect to say that you pay 32% of your income to the government in taxes. In actuality, your effective taxes were much lower than that because each segment of your income is taxed at a certain rate before it gets bumped into another bracket. (Not to mention deductions and credits)

Check out the tax rates for 2021!

Single Filer

Min Max Tax Rate

$- $9,950 10%

$9,950 $40,525 12%

$40,525 $86,375 22%

$86,375 $164,925 24%

$164,925 $209,425 32%

$209,425 $523,600 35%

$523,600 37%

-Your Friends at Red Oak Financial Group