013: What is a tax bracket

United States has a progressive tax system, which means different portions of your income are taxed at different rates. Generally speaking, you pay a higher overall tax rate if you have a higher taxable income.

The tax brackets range from 10% to 39.6%—and the more you earn the higher your bracket. But be aware that the rate is not applied flat across all your income. Portions of your income fall into different brackets, which means your actual tax rate is likely to be much lower than your bracket.

Your Effective tax rate:

While it’s likely you will pay income tax at various rates or tax brackets throughout the year, the actual percentage of your income that goes to the IRS is called- effective tax rate.

Here is an example for you: If half of your income is taxed at 10 percent and the other half at 15 percent, then your effective tax rate of 12.5 percent, which means that 12.5 cents of every dollar you earned this year goes to the IRS.

So the question remains, how can we keep our tax rate down.  Various Deductions and Credits help lower your taxable income, therefore it’s taxed at lower tax bracket. Example of deduction is Retirement Plan contribution (401k or IRA) help reduce taxable income.

 
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