# Tax Rate

## What it is:

A tax rate is the percentage of income a person or company pays in taxes.

## How it works (Example):

The United States has a progressive tax system, which means that different portions of a person's income are taxed at different rates (the rates are often referred to as "marginal tax rates").

For example, the IRS might tax a single filer's \$100,000 income as follows:

The first \$8,025 is taxed at 10% = \$802.50
The next \$24,525 is taxed at 15% = \$3,678.75
The next \$49,100 is taxed at 25% = \$12,275.00
The final \$18,350 is taxed at 28% = \$5,138
Total tax owed: \$21,894.25

Because this filer's highest taxable rate is 28%, we say that he or she is in the 28% tax bracket. Note, however, that not ALL of the taxpayer's income is taxed at 28%. In fact, the taxpayer's effective tax rate is \$21,894.25 / \$100,000 = 21.9%.

The highest tax brackets often change, but they are usually around 35%. Note that income tax rates exclude state taxes and social security/Medicare, which add as much as another 17%-18% in taxes.

## Why it Matters:

It's important to know the difference between tax brackets and tax rates. Many people assume that when they're in the 28% tax bracket, for example, that all of their income is taxed at 28%, which is not the case. As our example shows, you can be in the 28% tax bracket but have a much lower effective tax rate on your income.