I'm going to go over how tax brackets actually work.
Probably heard we have a progressive tax system.
Essentially that means the more
you make an income, the higher the tax rate you'll pay.
But it's not as simple as just having one
tax rate, and that's the rate you would pay on all of your income.
Instead, it's a graduated rate system, meaning that
your income is essentially taxed in different buckets.
The other thing about this is that there are multiple rate systems,
depending on what your filing status is.
Filing status is essentially forms of whether you're single.
From a legal standpoint or you're married from a legal standpoint.
And if you're married, you can either filed jointly,
which means you're filing a single tax return with your spouse,
or you could potentially file separately, which means you're married,
but you're each going to file your own tax returns
and there is also what they call the head of household status,
which essentially means that you are not married.
So you're single from a legal standpoint.
But you perhaps have someone,
another dependent in the House that you're supporting.
I'm going to just go over one or two of these
just so we can kind of get the idea of how this works.
But you can find this information easily online.
If you're curious how it pertains to your filing status
and things like that, you can just Google, you know, whatever tax year and federal
marginal rates and you'll be able to pull up these tables.
So I'm going to go over if you're filing in single first.
So essentially the first bucket that you have
here is $0 to
9950 actually taxed at a 10% rate.
Once you get over that tomorrow, then you end up in the next bracket.
You're looking at 12%.
So how this is actually working mechanically is let's say you make $40,000
even while you calculate how much 10%
on the first 9950
that you'd be paying on that first pocket, and then you figure out the difference.
So if it's 40,012%, add them together.
That's what your tax would look like.
The next one's 40,526
and you're going up to 86,000 375.
And that puts you in a 22% tax bracket.
So our next bracket starts
at 86,376
and goes all the way up to 164 925.
And that puts you at 24%.
So it starts to jump up there a little bit.
And then now or then in kind of close to our highest rate,
but the next one is going to be 35%.
That just means the income between 209,000
for 26 and five, 23 600 is going to be taxed at 35.
Everything else is going to be taxed.
These lower rates, depending on which bucket they fall in for our last one,
if you're fortunate enough to be in this bracket, is 523,006 one or more.
You're going to be paying the highest rate.
So that's essentially how it works.
This is just ordinary tax rates.
So this is, you know, the wages you earn.
Remember, there are preferential rates for certain types of income.
And so the more that you can maximize those preferential rates,
especially as you're getting into these higher brackets, the better off you are.
So you've got the capital gains rates, which top out at 20%, and you've got
the preferential dividends rates that are also topped out at 20%.
So you want to maximize those as much as possible.
In the lower brackets,
you actually get even lower capital gains rate the more income you have.
And in that category, the better off you're going to be.