Hey, Smarter Vets, CJ Burnett here. And today I’m going to talk to you about tax brackets. I know you were sitting in your office today in the afternoon. We’re just wondering how do tax brackets actually work? Right? It’s a very common thing to have John roll across someone’s mind.
So, when it comes to tax brackets, a lot of the times people think that just because they get in another tax bracket that they end up having to spend that the taxes actually go up by that amount on all of their income. An example of this is let’s say you had a cake and if you make enough money to buy one piece of the cake for the year and let’s say your taxes are 10 % then people would say, okay, you give up 10 % of that cake and that is true. The first, let’s say the first tier is 10%. Okay, you 10 % of that first cake to the government.
And if you are lucky enough to make two pieces of cake, enough money to buy two pieces of cake that year, and now you’re in the 12 % tax bracket, then you would pay 12 % tax on the two pieces of cake. That’s not how that works. The tiers work in a way where if you made the first piece of cake that you made, you paid 10 % of tax on that. And then that second piece of cake that you made, you would pay 12 % on just that one piece.
In other words, if you average it out, it’s 11%. And this is why a lot of people don’t really realize that there’s a difference between marginal tax brackets and effective tax brackets. So there’s a tax that you pay on every additional dollar that you make for the year. Let’s say in that scenario, if I made enough money to get a third piece of cake, and now I’m in a say 15 % tax bracket, I would pay 10 % tax on the first piece of cake that I made that year. I’d pay 12 % tax on the second piece of cake and then I’d pay 15 % on the third piece of cake. And so the next tax bracket that you get in, you’re just paying that amount of tax on that next tax bracket. So if the 15 % of that third cake, let’s say if you were to make only half enough to buy half of that third piece of cake, then you would only be paying 15 % on that one little slice.
I hope this helps. hope this brings some clarity to you around how tax brackets actually work. And maybe now whenever you’re talking to your accountant and they talk about the difference between your marginal and your effective, you can go, yeah, I remember that from that video that CJ did on YouTube that you watched because you were so worried about how tax brackets work when you were in your office one day.
Video Summary:
One of the most common tax misconceptions is that moving into a higher tax bracket means all your income will be taxed at that new, higher rate. Thankfully, that’s not how it works.
In reality, the U.S. tax system is tiered—meaning only the income within each bracket is taxed at that bracket’s rate. CJ Burnett, CExP and co-founder of Florida Veterinary Advisors, explains it best with cake. 🍰
Your first “slice” of income might be taxed at 10%, your next slice at 12%, and so on. If you make enough to reach a new bracket, only the dollars above the previous threshold are taxed at the higher rate. This is the difference between marginal and effective tax rates.
Understanding this can take the fear out of earning more and help you have better conversations with your accountant. Watch the full video for CJ’s simple breakdown.
This material is intended for general public use. By providing this content, Park Avenue Securities LLC and your financial representative are not undertaking to provide investment advice or make a recommendation for a specific individual or situation, or to otherwise act in a fiduciary capacity. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Tom is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. Florida Veterinary Advisors and The Next Step Planning Group are not an affiliate or subsidiary of PAS or Guardian. California Insurance License #0K80141. AR Insurance License #15823672. Florida Veterinary Advisors is not registered in any state or with the U.S. Securities and Exchange Commission as a Registered Investment Advisor. The individuals associated with Florida Veterinary Advisors do not maintain specialized licenses or qualifications for the financial services provided to veterinary professionals. 7989827.1 Exp 5/27