As tax time has come to an end, many people are reflecting back on what happened during tax season. Many bemoan the fact that they've entered a higher tax bracket, figuring that it has dramatically raised the amount of tax they owe. Yet one common misconception could give you the wrong idea about moving into a higher tax bracket and its overall impact on your taxes.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, reveals one big mistake many people make about tax brackets. Dan notes that many people think that when you go into a higher tax bracket, you have to pay a higher rate on all of your income. In reality, though, your tax bracket only determines your marginal tax rate on the last dollar of income you earn, not every dollar of your income. As a result, doing things to keep yourself below a higher tax bracket are generally counterproductive if they result in your giving up actual income that would have made you richer.
Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.