How exactly do tax brackets work?

Question

I know that different incomes are taxed at different rates, but don't quite get exactly how the math works out. If I make just enough to bump me into the next tax bracket, is it possible for me to have less net income?

Here's a hypothetical situation. Last year I made $24k, and was taxed at %10. This year, I made $26k, which puts me in the %20 tax bracket. Last year's net income would then be $21,600, and this year's would be $20,800.

Is that right?

Answer 1

The first X amount of dollars are taxed at the lowest rate.
The second X amount of dollars is taxed at the next highest rate. and so on.

The complications come in with exemptions, deductions, and adjustments and such, but that is the basic stuff.

Answer 2

No it's not right. Only the amount of your additional income that goes above the limit for the next bracket is taxed at the higher rate. Everything else is taxed at the same rates it was before. You don't pay the higher "bracket" percent on your entire income. So no, it's not possible to make less net income because you are now in a higher bracket.

Answer 3

No but many people make the same incorrect assumption. Assume your income was at the top of the 10% bracket...you would pay 10% of the taxable income. If you earned an addition $1000 that put you in the next higher tax bracket of 15% you would only pay 15% of the amount in the higher tax bracket, or 15% of $1000 plus 10% of the amount in the lower tax bracket.

Answer 4

No, only the amount that exceeds the ceiling for the 10% bracket would be taxed at the higher rate.

Using your example, assume that $24k was the ceiling for the 10% bracket. You'd pay $2,400 in tax for the first $24k in the 2nd year, plus 20% of the next $2,000 or $400 for a total of $2,800. Here's how the figures would look.

Year one: Income: $24,000. Tax: $2,400. Net: $21,600
Year two: Income: $26,000. Tax: $2,800. Net: $23,200