Understanding Federal Tax Brackets

Simple question, what tax bracket are you in? If you could not answer this question with ease then you need to make it a priority to read and learn from The Clever African. On December 19th 2017 Congress voted to approve a monumental change in federal taxation and you need to be aware of how these changes affect your money.

Although the bill will have corporate ramifications, we will focus on the effect on individual taxpayers. Below is a comparison between tax rates from 2017 to 2018. As you can see, the new bill lowers federal taxation for various salary groups.


In the United States, the government uses the concept of progressive taxation. To better explain this idea, grab a calculator and test your knowledge with this ‘Clever’ Exercise.

Using the table above: A single person makes $40,000 in the year 2018 – how much does this person pay in federal taxes?

 

If you guessed $8,800 you are wrong. The correct answer would be [ $4,739.50 ]Here is why:

Consider the table to the left. If you erred on the above example, it is likely because you calculated a straight tax rate and not a progressive tax rate. Using straight or linear tax, Obi would actually bring home more money than Ama, even though she has a lower salary. This would simply be unfair, thus progressive taxation provides a solution to this problem.

 

Progressive tax is not linear, ie it does not tax Ama 22% of her $40,000 earnings and tax Obi 12% of her $38,700 earnings. Rather, the taxes increase progressively as you enter into a new bracket. For example, both Obi and Ama are taxed the same 10% rate of their first $9,525 earned, both are taxed the same 12% on earnings between $9,526-$38,700, and finally Ama is taxed 22% on her earnings between $38,701-82,500 (taxed $286 of the $1300 earned from $38,700 to $40,000).

 

 

These are some of the nuances you should be aware of when it comes to your taxes and your money. Off course, there are many ways to lower your taxable income and maximize your earnings. We have introduced you to the new tax brackets, but there is even more to learn if you want to be a clever African.  

 

We encourage you to leave comments below on any thoughts relating to this post.  If you have private suggestions or feedback, feel free to send us a message.

THE CLEVER AFRICAN: INVEST IN YOU

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