The easiest way to understand the progressive tax system is to consider income in buckets. The first bucket of income is taxed at 10%, the second at 12%, the third at 22%, and so on.
For example, let’s say you have gross wages of $50,000. The first $10,275 is taxed at 10%, the next $31,500 is taxed at 12%, and the remainder of your salary ($8,225) is taxed at 22%. Your total tax liability would be broken down like this:
These buckets are called “tax brackets.” The idea is to treat everyone equally while still requiring higher taxes from higher earners.
For instance, the first $10,275 that Jeff Bezos makes is taxed at 10%, just like everyone else. The only chunk of his income taxed at the highest rate (37%) is the income above half a million dollars.
You may have heard the terms “marginal” and “effective” tax rates thrown around. Your marginal tax rate refers to the highest tax bracket your income is exposed to. So using the example above, where you made $50,000, your marginal tax rate would be 22%.
But we’ve learned that most of your income isn’t taxed at 22%. So the effective tax rate describes the average rate you pay. Using the example above, your effective tax rate would be 14%. That’s the average of 10, 12, and 22: 10 + 12 + 22) / 3 = 14.
The income tax brackets for 2021-2022, by filing status
Now that you have the basics, there’s another complicating factor: filing statuses.
The tax brackets are determined according to your filing status: single, married filing jointly (MFJ), married filing separately (MFS), and head of household (HoH). See the table below: