Here's What Happens When You Hit a Higher Tax Bracket

If you earn significantly more in 2023 than you did in 2022, it's possible that your income could fall into a higher tax bracket than it previously did. While it is common knowledge that moving to a higher tax bracket will usually result in a higher tax bill, many people don't know how to figure out the impact it will have on their wallets.

With that in mind, here's a quick overview of the U.S. tax brackets, how they are used to determine your income tax for the year, and how to apply these to your taxable income to figure out how much more you'll pay if you move into a higher bracket.

The 2023 U.S. tax brackets

Under the current tax law, there are seven individual income tax brackets in the United States. The income ranges that each tax bracket applies to are adjusted for inflation each year, and here's what they are for the three most common filing statuses for the 2023 tax year (the return you will file in 2024):

Also, keep in mind the tax brackets are only applied to taxable income, meaning after all of the deductions you qualify for are subtracted.

How the marginal tax system works

One common misconception -- especially among younger Americans -- is that your tax bracket is the percentage that is applied to all of your taxable income. But this isn't how it works.

The United States uses a marginal tax system, which means the income tax rates are only applied to certain income. For example, if you are single and have $100,000 in taxable income in 2023, you are in the 24% tax bracket. But that percentage is only applied to your taxable income over $95,375.

A real world example

If this sounds confusing, it's completely understandable. So, let's use the tax bracket table above to look at how this could work in the real world.

Let's say you're a married couple filing a joint tax return, and you have $100,000 in taxable income in 2023. According to the table, this puts you in the 22% tax bracket.

However, you only pay the 22% tax rate on your income that is greater than $89,450. You pay the lower tax rates on the rest of your income. Specifically, here's how you could calculate your federal income tax for 2023:

• 10% of the first $22,000 in taxable income = $2,200.
• 12% of the amount greater than $22,000 but less than $89,450. This rate therefore applies to $67,450 of your income, which adds $8,094 to your tax liability for the year.
• Finally, the 22% rate would apply to taxable income greater than $89,450. Since your taxable income in 2023 is $100,000, this rate would apply to $10,550 of your income, resulting in tax of $2,321.

Adding these three results together shows that your federal income tax for 2023 is $12,615. One important takeaway is that even though you're in the 22% tax bracket, this tax amount is just 12.6% of your total taxable income.

How much will your income tax go up?

The short answer is that it depends on your situation. Moving from the 24% to the 32% tax bracket is a bigger leap than moving from 22% to 24%. And it depends how much of your income falls into your new, higher tax bracket. So, while moving to a higher tax bracket will almost certainly increase the amount of federal income tax you pay, the exact impact on your wallet will depend on your unique circumstances.