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How do Tax Brackets Work? [Video]

Learn more about how tax brackets work, and find out how they can work in your favor.

Video Transcript:

Chad Chandler: There’s a lot of confusion about what tax brackets really mean. Many people think that if they earn more money, they jump to a higher tax bracket and pay more taxes and then have less money than they would if they earned less. Can you clarify what tax brackets are and what they actually mean?

Kristina Knowles: Say you’re in the upper end of the 15% tax bracket, then you earn a bonus that puts you into the next tax bracket of 25%, but only by $5000. Only the $5000 differential is taxed at 25%. Each dollar you earn only affects the tax rate on additional income – it does not change the tax rate you pay on dollars in lower tax brackets.

If you are in the 25% tax bracket, for example, you pay tax at three different rates – 10%, 15%, and 25% – on different levels of your income. Because of the tax brackets, you always have more money after taxes when you earn more.

Of course, tax rates are not the only factor in the final tax bill. When you have higher income, you can lose tax benefits such as education credits that phase out at higher income levels. Knowing and understanding your tax rate helps when you’re thinking about making retirement plan contributions.

We use tax planning software to see how different levels of income, combined with deductions and exemptions, affect your final tax bill. Our goal is to assist our clients in making educated and informed decisions about tax planning.

Chad Chandler: Thanks, Kristina. At Chandler & Knowles, we provide comprehensive financial planning. Contact us to learn more about these tax-saving techniques.

Contact a Tax Professional Today

To learn more about the tax planning services at Chandler & Knowles CPAs, contact us today at (817) 369-3874 or fill out our contact form to schedule your appointment at one of our offices in Flower Mound or Addison, TX. Not from the area? We are still happy to assist you over the phone or through email.

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