How do tax brackets work?

Congratulations! Earning more money means more money in your pocket. When you earn more money, your position in the above graph will move over to the right. Sometimes this will mean you enter a new tax bracket (ie. cross a jump on the green line). Don't worry though; this new tax bracket only applies to the money you earn while you stay in this bracket! While it is generally true that you get to keep less of the money you earn while in the higher tax brackets, the amount you get to keep from the money earned in the lower brackets will not be affected.

As you can see from the above graph, the amount of tax you pay for each income level is a fairly smooth line (see the blue line). The orange line then shows the average tax rate for each dollar you earned. Much of the time this effective tax rate is more useful than your marginal tax rate for assessing how you are being taxed.

Mouse over the graph and see for yourself the taxes for each income level!

Note that there are some tax brackets at much higher income levels which are not presently shown. They have been omitted to show the greatest detail for the more common income levels.

Credits and deductions are similar in that they both reduce the taxes you owe, but credits are applied directly to your taxes owed and deductions are applied to the income you earned. As a result, credits affect all earners by the same amount of dollars (ie. a $100 credit saves $100 for someone earning $20,000 and for someone earning $200,000) while deductions come "off the top" and effectively lower your income tax bracket (ie. a $100 deduction for someone currently in a lower bracket of 10% would save $10, but someone in a 30% tax bracket would save $30).

Try adjusting these sliders to see the approximate effects different types of credits and deductions have on your taxes!

Credits (Refundable):

Credits (Non-refundable):

Deductions:

The taxes you pay on your income each year are broken into two main categories: Federal and State (some states do not have an income tax). Each of these respective governments has their own tax rate which are applied on your income independently. As a result, excess credits and deductions applied to one income tax cannot be carried over to the other.