Voiceover: You'll hear the word "tax bracket"
thrown around a lot,
and there's often a misunderstanding
of what a tax bracket is,
so that's what we're going to do in this video.
I'm going to do it in a very general, simple way
that doesn't use the exact same tax code
of any particular country,
but most countries use
some kind of a progressive tax system,
that has some type of tax brackets.
Let's say my country has a tax code
that says between $0 of income and $10,000 of income
you pay no taxes on it,
and then between 10,000 and, let say, 50,000,
let me write that a little bit neater,
between 10,000 and 50,000,
so that's 50,000 right over there,
you pay 20% of your income,
and then let's just say,
this is very simple;
much simpler than any actual tax codes out there;
let's say anything above $50,000, you pay 30%.
30% of your income.
The reason why I say that there is confusion here
is many people feel
that if their income throws them into a bracket,
that they pay 20% on all of their money,
but that's not the way it works.
Let's just do a couple of examples.
Let's say that someone earns ...
let's say income,
and then let's think about how much taxes they will pay.
Let's say someone makes $5,000 in income.
How much taxes would they pay?
The first $10,000 you pay no taxes,
so they'd pay $0 in taxes.
Let's say someone has $15,000.
$15,000 in income.
How much taxes would they pay?
They would pay 0% on the first $10,000,
so it would be 0% x $10,000.
x £10,000,
and then the next 5,000,
they're going to be right over here,
the next 5,000 they're going to pay 20%.
So, + 20% x the next $5,000.
The next $5,000.
They'll pay, this is just 0,
then 20% of $5,000.
They will pay $1,000 in taxes.
The misconception that many people have
is, "Oh, $15,000 puts me into this middle bracket,
"so I'm going to have to pay 20% on all $15,000,"
and that's not the way it works.
You only pay 20% for the increment
that throws you in that bracket.
Just for the $5,000.
Let's do another example.
Let's say that someone makes $100,000.
$100,000.
How much taxes would they pay?
It wouldn't be that they're in this last bracket,
so they'd pay 30% on their entire $100,000.
They pay 0% on the first 10,000.
0% x 10; I'll just write "10K" for 10,000.
Then they'll pay 20% on the next 40,000.
This range right over here.
So, + 20% x the 40,000,
and then they only pay 30% on the increment of their income
that is above this $50,000 threshold.
Then they will pay 30%.
They will pay 30% x the next $50,000,
so 10,000 + 40 + 50.
That's what adds up to $100,000.
x $50,000.
This adds up to, well, this is nothing.
20% of $40,000 is going to be $8,000.
Then 30% of $50,000 is going to be 15,000.
Is going to be $15,000.
In this situation, the person will not pay 30%
on the entire 100,000.
They will pay 8,000 + $15,000,
which is equal to $23,000 in income taxes.