Estimating Your Federal Income Tax

Your Income in a Progressive Tax System With Marginal Tax Brackets

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The average American wants to share little to none of his or her earnings with Uncle Sam. There is an expression, "Don’t tax you. Don’t tax me. Tax that man behind the tree." 

As you can imagine, income tax can gnaw on a worker’s wages. With some simple calculations, you can determine what your disposable income will be.

Calculating Disposable Income

Your disposable income is the amount of money that remains after paying federal income tax. Keep in mind, this does not factor in state, city, sales, or property taxes. So, according to the federal government, this may be your "disposable" income, however, as you factor in all your living expenses and other taxes, your true disposable income may be a lot less than you think.

Your Money in a Progressive Tax System

When you take a new job, you may have negotiated for a nice, high salary. That also means you can expect that the federal government will take a nice chunk of it, too. 

The U.S. federal income tax system is progressive, which means the more you make, the higher your tax rate. Taxpayers who earn below a certain amount set by the government would pay little to no tax, while workers who earn six figures or more annually have a mandatory tax rate that can be upwards of 25 percent. 

Making Sense of Marginal Tax Brackets

The tax system uses seven tax brackets, which is referred to as a marginal tax bracket system. What you need to do for a quick estimate is know your exact salary and find the current year's marginal tax bracket.

For an example, look at the 2017 tax bracket for people who are filing as unmarried or single. 

2017 Tax Rate Income Bracket
10% $0 to $9,325
15% $9,326 to $37,950
25% $37,951 to $91,900
28% $91,901 to $191,650
33% $191,651 to $416,700
35% $416,701 to $418,400
39.6% more than $418,400

If you are filing as single and you want to make a quick estimate (it will be an overestimate), you can look at your salary and then look at the corresponding tax rate. If you make $100,000 you can expect to pay no more than 28 percent in federal taxes or $28,000 in taxes. This does not account for deductions or any other credits you can claim.

In fact, because this is a "marginal tax rate" system your actual tax rate will actually be less than 28 percent because your income is taxed bracket by bracket. Meaning, as your income increases, then you are taxed according to that bracket, and you will ladder up until you reach your income level. Here's an example, if you are single and make $100,000 a year:

  1. The first $9,325 that you earned is taxed at 10 percent for $932.50 (the first bracket)
  2. Then, the next $28,625 ($37,950-$9,325) that you earned is taxed at 15 percent for $4,293.75 (the second bracket)
  3. After that, the next $53,950 that you earned is taxed at 25 percent for $13,487.25 (the third bracket)
  4. Lastly, the last $8,100 that you earned (which brings the total of your earnings to $100,000) is taxed at 28 percent for $2,267.72 (your last bracket)
  5. You add each of those tax calculations from each bracket together ($932.50 + $4,293.75 + $13,487.25 + $2,267.72 = $20,981.22).

Your actual tax rate, also known as your effective tax rate, is actually closer to 21 percent, which calculates to be just under $21,000. This is considerably less than 28 percent (or $28,000) that the marginal tax rate table might lead you to believe that you would owe.