How US income taxes work

Imagine all your taxable income last year as a vertical stack—a tower going up from the ground—of one dollar bills. (More on taxable income later…)

Now divide that tower into floors or levels, just like a skyscraper.

The height of each floor depends on your filing status (more on that later), so for now let’s assume you’re single. (The floors are also adjusted each year for inflation.)

Each floor also has a specific tax rate. The rate increases a little with each floor.

In 2022, the height of the first floor for a single filer is $10,275, and the rate is 10%. This is what we mean by a tax bracket. Each bracket, or floor in your tower of taxable income, has two components: a range, or the height of the floor, and tax rate at which that floor’s income is taxed.

That means for every dollar in the bottom $10,275 of your taxable income, you will pay 10% of that floor. So the most income tax you will pay on that first floor is $1,028 (10% of $10,275, rounded).

The height of the next floor for a single filer is $41,775, and the rate is 12%. Notice that makes the height of the second floor, the 12% floor, just $31,500, because the first $10,275 belongs to the first, or 10%, floor.

But here’s the catch: only your income above $10,275 is taxed at 12%. The first $10,275 is still taxed at 10%. So if you made exactly $41,775 in taxable income last year, you would have $4,808 of tax. That’s $1,028 (10% of 10,275) plus $3,780 (12% of $31,500, the height of the second floor in your tower of taxable income.

Let’s go up one more floor, where the height is $89,075 for a single filer, and the rate is 22%. That’s quite a jump from 12% to 22%!

But keep in mind: only your income above $41,775 is taxed at that rate. So if you made exactly $89,075, you would pay $15,214 in tax. That’s the $1,028 from the first floor, $3,780 from the second floor, and $10,406 from the third floor.

And that’s how we calculate income tax in the US. (Most states that have an income tax use a similar system with different bracket heights and rates.)