How Income Tax Really Works

The story: Jade’s raise

Jade and a coworker, Marcus, talk in an office about a raise while rising tax buckets fill one at a time.

1. Narrator: Jade answers phones at a call center and was just offered a raise.
2. Jade: A friend says a raise could push me into a higher bracket, so I’d take home less. Is that true?
3. Marcus: Brackets don’t work that way. Only the dollars above the line pay the higher rate.
4. Narrator: Think of buckets. Income fills the lowest bucket first, at the lowest rate. Only what spills over gets the next rate.
5. Narrator: Example with made-up brackets: if the raise lands in a 20% bucket, each new dollar owes 20 cents of income tax. The dollars below don’t change.
6. Jade: So the raise is still a raise.
7. Narrator: Only the new dollars get the new rate.

What you’ll learn

1. Brackets are buckets

   Federal income tax uses brackets. Your income fills the lowest bucket first, at the lowest rate, then spills into the next. Each rate applies only to the dollars inside its bucket. This year’s brackets are on the fact card.

2. Marginal vs effective rate

   Your marginal rate is the rate on your last, highest dollar. Your effective rate is your total tax divided by your income. The effective rate is usually much lower than the top rate, because most dollars were taxed at lower rates.

   Example (made-up brackets): 10% on the first $20,000 and 20% above it. On $30,000, tax is $2,000 + $2,000 = $4,000, an effective rate of about 13%.

3. Taxed on taxable income

   Brackets apply to taxable income: what’s left after tax deductions, like the standard deduction ($16,100 for a single filer). FICA, for Social Security and Medicare, is a separate tax. Many states and some cities tax income too.

4. When a raise can cost you

   Brackets alone never make a raise cost you. The real exception is a benefit cliff: some help programs stop at an income line, so a small raise can mean losing more help than the raise adds. People near a cliff check the program’s rules first.

Key words

bracket

a range of income taxed at one rate

marginal rate

the tax rate on your last, highest dollar

effective rate

your total tax divided by your income

taxable income

income left after tax deductions, which the brackets apply to

Common questions

Why does my paycheck tax look higher than my effective rate?

A paycheck also takes out FICA and maybe state tax, and withholding is an estimate. The tax return at the end of the year settles the real amount.

Do bonuses get taxed more?

A bonus is income like any other at tax time. More may be withheld from the bonus check, but the tax return settles the real amount, so extra withholding can come back as a refund.

Remember this

Only the new dollars get the new rate.

Try it: Find your effective tax rate

1. Open the Take-Home Pay Calculator.
2. Enter your pay, or an example amount.
3. Find the effective tax rate and compare it with the top bracket you reach.

See your effective tax rate in the Take-Home Pay Calculator.

Live facts

Numbers that change over time, with when they were last checked and where they come from.

• Standard deduction, single

  $16,100

  Income a single filer can earn before federal income tax starts

  As of 2026

  Source: IRS.gov(opens in a new tab)

• This year’s federal income tax brackets

  Source: IRS.gov(opens in a new tab)