if you understand how income tax
brackets work it’s gonna help you make better financial planning decisions the
rest of your life what’s going on guys Hey guys its Mike. I’m very excited to be
making this video because we’re gonna be talking about how income tax brackets
work and what better way to explain income tax brackets than by using a
ladder let’s do this hey guys welcome to money and life TV I
am M K the CPA and along with my sidekick chipper today we’re gonna be
talking about income tax brackets and also we’re having a very special guest
joining us today and his name is drumroll please mr.
cockatoo all right guys so mr. cockatoo he’s
gonna help us explain income tax brackets and the way he’s gonna do that
is he’s gonna climb the ladder for us as we explain visually how tax brackets
work I’ll be honest when I came out of college after even getting an accounting
degree you only take one tax class the college I went to and so you literally
know nothing about taxes when you leave college and for a while I’ll be honest I did not
truly understand how that income tax brackets work now I should point out in
this video I’m only talking about federal income taxes there are state
income tax brackets as well however not every state has them that is why I’m
only talking about federal income taxes if you live in a state like New York
California I live in California so I get the privilege of paying state income
taxes as well but some of those states do have income
tax brackets and it works the exact same way as federal tax brackets but for the
purposes of this video we’re just talking about federal income tax
brackets so what I’m finding guys is the biggest misconception that people have
about income tax brackets is they think they’re only paying one rate of income
tax and generally that couldn’t be any further from the truth
you actually pay multiple rates of tax on the income you earn so what I did for
this video is I took a $40,000 income and that’s what we’ll use as in our
example why $40,000 because through my research that currently in 2016 2017
$40,000 a year is the average income for a person working full-time here in
America so regardless of your filing status whether you file single whether
he filed married filing joint whether you’re filing a head of household every
one of those filing statuses has an federal income tax bracket but it works
the same way no matter what your filing status is the only thing that’s a little
different is the numbers themselves here’s a picture of the federal income
tax brackets if your filing status is single go ahead and pause the video to
view the rates in the description section of this video I’m gonna include
links to where you can find these tax bracket tables for yourself so whether
you’re filing is that a single head of household marry filing joint etc alright guys so the carpet on my floor
is gonna be at the zero and the 10 percent range the first run here in the
ladder is fifteen percent the second rung is gonna represent 25 percent the
third rung is gonna represent twenty eight percent thirty three percent
thirty five percent and at the very top is thirty nine point six percent so like
I said we’re gonna use an example of person file a single who makes $40,000 a
year now as you guys can see back there he’s kind of small and tiny in the in
the corner of the door but mr. cockatoo let’s pretend it’s January first of the
year so mr. cockatoo has this partied hard
he’s partied all night he had this great celebration but now it’s gonna be
January 2nd and he’s ready to start making some money for the year if he’s
on the floor that means he’s in the 0 to 10 percent tax bracket at the moment
right so the first nine thousand three hundred and twenty-five dollars in wages
mr. cockatoo will only be taxed at 10% so mr. cockatoo he earned his first nine
thousand three hundred twenty-five dollars and now let’s pretend it’s the
month of February or March but net so now he’s going to surpassed his nine
thousand three hundred twenty-five dollars in income which means according
to our tax brackets that he’s gonna be bumped up into the next tax bracket rate
so now as you guys can see mr. cockatoo is now on the first rung of the ladder
which represents the fifteen percent tax bracket so any income he makes from this
point up to thirty eight thousand dollars he’ll be taxed at 15%
so mr. cockatoo kept working away working hard and now finally towards the
end of the year he’s made a total of thirty eight thousand dollars which
means the NICS dollar he makes is gonna put him into the next tax bracket so mr.
cockatoo moves up into the is it tax bracket rate right here good
job mr. cockatoo you’re really putting in your hours so now we’re in December
mr. Kafka too is already at $38,000 for the year and as he finishes out the year
on the very last day of the year on December 31st he hits his income of
$40,000 okay guys now let’s break out mister
cockatoos tax liability for the year on the income he discerned I’m gonna show
you guys the calculations on-screen or how this breaks out you gotta keep them
separated so final thoughts on this guy’s think of
income tax brackets like a ladder as you your income goes up and you climb the
ladder of tax rates your marginal tax rate will increase as well so in the
description section below I’m gonna include links to where you can find
these tax tables alright guys if you like the video make sure to drop a like
cuz it really helps us out when we appreciate your support I hope you found
this information helpful if you have any questions or comments or if I could
explain something better or if you feel that I did not answer your question
please drop a comment or question down below and I will make sure to respond
mr. cockatoo you were such a good sport thanks for helping out and remember on
this channel chipper and I as well as mr. cockatoo teaches information to help
you live your life on caged bye guys see you next week