if you understand how income tax brackets work it's gonna help you make
better financial planning decisions the rest of your life what's going on guys
Hey guys its Mike. I'm very excited to be making this video because we're gonna be
talking about how income tax brackets work and what better way to explain
income tax brackets than by using a ladder let's do this
hey guys welcome to money and life TV I am M K the CPA and along with my
sidekick chipper today we're gonna be talking about income tax brackets and
also we're having a very special guest joining us today
and his name is drumroll please mr. cockatoo
all right guys so mr. cockatoo he's gonna help us explain income tax
brackets and the way he's gonna do that is he's gonna climb the ladder for us as
we explain visually how tax brackets work I'll be honest when I came out of
college after even getting an accounting degree you only take one tax class the
college I went to and so you literally know nothing about taxes when you leave
college
and for a while I'll be honest I did not truly understand how that income tax
brackets work now I should point out in this video I'm only talking about
federal income taxes there are state income tax brackets as well however not
every state has them that is why I'm only talking about federal income taxes
if you live in a state like New York California I live in California so I get
the privilege of paying state income taxes as well
but some of those states do have income tax brackets and it works the exact same
way as federal tax brackets but for the purposes of this video we're just
talking about federal income tax brackets so what I'm finding guys is the
biggest misconception that people have about income tax brackets is they think
they're only paying one rate of income tax and generally that couldn't be any
further from the truth you actually pay multiple rates of tax
on the income you earn so what I did for this video is I took a $40,000 income
and that's what we'll use as in our example why $40,000 because through my
research that currently in 2016 2017 $40,000 a year is the average income for
a person working full-time here in America so regardless of your filing
status whether you file single whether he filed married filing joint whether
you're filing a head of household every one of those filing statuses has an
federal income tax bracket but it works the same way no matter what your filing
status is the only thing that's a little different is the numbers themselves
here's a picture of the federal income tax brackets if your filing status is
single go ahead and pause the video to view the rates in the description
section of this video I'm gonna include links to where you can find these tax
bracket tables for yourself so whether you're filing is that a single head of
household marry filing joint etc
alright guys so the carpet on my floor is gonna be at the zero and the 10
percent range the first run here in the ladder is fifteen percent the second
rung is gonna represent 25 percent the third rung is gonna represent twenty
eight percent thirty three percent thirty five percent and at the very top
is thirty nine point six percent so like I said we're gonna use an example of
person file a single who makes $40,000 a year now as you guys can see back there
he's kind of small and tiny in the in the corner of the door but mr. cockatoo
let's pretend it's January first of the year so mr. cockatoo has this partied
hard he's partied all night he had this great
celebration but now it's gonna be January 2nd and he's ready to start
making some money for the year if he's on the floor that means he's in the 0 to
10 percent tax bracket at the moment right so the first nine thousand three
hundred and twenty-five dollars in wages mr. cockatoo will only be taxed at 10%
so mr. cockatoo he earned his first nine thousand three hundred twenty-five
dollars and now let's pretend it's the month of February or March but net so
now he's going to surpassed his nine thousand three hundred twenty-five
dollars in income which means according to our tax brackets that he's gonna be
bumped up into the next tax bracket rate so now as you guys can see mr. cockatoo
is now on the first rung of the ladder which represents the fifteen percent tax
bracket so any income he makes from this point up to thirty eight thousand
dollars he'll be taxed at 15% so mr. cockatoo kept working away
working hard and now finally towards the end of the year he's made a total of
thirty eight thousand dollars which means the NICS dollar he makes is gonna
put him into the next tax bracket so mr. cockatoo moves up into the
is it tax bracket rate right here good job mr. cockatoo you're really putting
in your hours so now we're in December mr. Kafka too is already at $38,000 for
the year and as he finishes out the year on the very last day of the year on
December 31st he hits his income of $40,000
okay guys now let's break out mister cockatoos tax liability for the year on
the income he discerned I'm gonna show you guys the calculations on-screen or
how this breaks out you gotta keep them separated
so final thoughts on this guy's think of income tax brackets like a ladder as you
your income goes up and you climb the ladder of tax rates your marginal tax
rate will increase as well so in the description section below I'm gonna
include links to where you can find these tax tables alright guys if you
like the video make sure to drop a like cuz it really helps us out when we
appreciate your support I hope you found this information helpful if you have any
questions or comments or if I could explain something better or if you feel
that I did not answer your question please drop a comment or question down
below and I will make sure to respond mr. cockatoo you were such a good sport
thanks for helping out and remember on this channel chipper and I as well as
mr. cockatoo teaches information to help you live your life on caged bye guys see
you next week