Something that bothers me is how I came to learn how the progressive tax system in the US actually worked. It wasn't until a couple years ago that I learned that I was wrong on taxes and how much people paid. And if it wasn't for a random comment on the internet, I would probably still be wrong about them.

Ever since I heard about how the tax system was bracketed, and that people in different brackets paid x% of their income in taxes, I had just assumed they paid that x% on their entire income, and if you made even one measly dollar of income into the next bracket, you paid that bracket on everything. And that's why I was wrong (along with mostly everybody I knew), because it doesn't work like that at all. Go figure, I was wrong about something that school didn't bother to teach me about.

So, I write this entry to help explain to those who also don't know how the tax system works, how it, well, works. So let's start out with the current estimated brackets for 2016 (as of 7/16/2016).

Rate Single Filers Married Joint Filers Head of Household Filers
10% $0 to $9,275 $0 to $18,550 $0 to $13,250
15% $9,275 to $37,650 $18,550 to $75,300 $13,250 to $50,400
25% $37,650 to $91,150 $75,300 to $151,900 $50,400 to $130,150
28% $91,150 to $190,150 $151,900 to $231,450 $130,150 to $210,800
33% $190,150 to $413,350 $231,450 to $413,350 $210,800 to $413,350
35% $413,350 to $415,050 $413,350 to $466,950 $413,350 to $441,000
39.6% $415,050+ $466,950+ $441,000+

To keep things simple, we're going to focus solely on Single Filers. So, under my previous assumption, where I thought a person paid the bracket they're in on the entirety of their income, a person making $37,650 would pay $5,647.50, and a person making $37,651 would pay $9,412.50. And that is far more than what someone would actually pay.

The way it actually works, I learned, is that a person pays each bracket separately, up to the bracket they are in, from each other. So, you would pay 10% on the first $9,275 they earn, 15% on the next $28,375 they earn, 25% on the next $53,500 they earn, and so on.

So, what someone making $37,650 actually pays is $5,183.75 ($927.50+$4,256.25), and a person making $37,651 pays $5,184 ($927.50+$4,256.25+$0.25). That increase of $0.25 is definitely way better than the almost $4,000 increase one would face if we paid the bracket we were in on our entire earnings.

Nearly the entire US population falls into the 28% tax bracket. 2013 saw around 90% of the population earned $100,000 or less, meaning almost all of Americans pay $21,036.75 ($927.5+$4256.25+$13375+$2478) or less in taxes. That's nearly 3/4 of the $28,000 they'd be paying if taxes worked the way I thought before (and possibly the way a lot of Americans think the tax system does work).

So, in general, people pay a lot less in taxes than they actually may think they do. If you know anybody who doesn't know how the tax system works, feel free to share this post.