What is my tax rate and why did I pay so much?
🙋♂️ Income Tax Brackets
When you look at your paycheck, you will see different taxes taken out…
Income Taxes
Social Security
Medicare
The top tax gets bigger as you make more income.
The bottom 2 are known as FICA taxes and are standard for all earners(discussed belw)
Income taxes can be confusing when you are first starting out because not all of your income is taxes the same.
Income taxes are broken into brackets. Every tax payer pays the same rate in each bracket. When you move up into a new bracket, only the additional income earned in the higher bracket is subject to the new tax rate. This creates a level of fairness for everyone.
Marital status affects how much money is in each bracket. Married couples can earn more money before moving into a higher bracket than single filers, etc.
Below are the income tax brackets for 2025. These different tiers are what lead us to ‘Blended Tax Rate’ and ‘Marginal Tax Rate’.
🔥 Blended Tax Rate
This is often referred to as you effective tax rate. It is arrived at by averaging out the total money you earned among each different tax bracket and the total taxes you paid.
As an overly simple example…
- You are a Single filer
- You earn $58,475 in 2025 after deductions.
- Your first $11,925 is taxed at 10%
- Your next $36,550 is taxed at 12%
- Your next $10,000 is taxed at 22%
In this case…
- You are in a 22% tax bracket
- Your blended tax rate is 13.3%
Pro Tip –
- The above is your taxable income after deductions, so the reality is that you are actually paying much less in taxes. For a Single filer in 2025, the ‘Standard Deduction’ is $14,600.
- The taxpayer above made $73,075. In reality, total income taxes were only about 10.5%
➕ Marginal Tax Rate
This refers to the tax rate applied to your next dollar of income. It is usually the same rate as your current tax bracket. So if you are in a 32% tax bracket, your next dollar earned will be taxed at 32%. Your marginal tax rate on that dollar is 32%.
This becomes more important when discussing how to reduce your taxes. You will hear this more in financial planning.
As an example…
As a single filer, you make $200,000 in 2025.
Your tax bracket is 32%. If you contribute to retirement, you will reduce your taxes owed by 32% of what you contribute, until you drop to a lower tax bracket.
If you contribute $10,000 to retirement…
You will save 32% on the first $2,700 contributed.
Then your tax bracket drops to 24%.
The next $7,300 in contributions will save you 24% in taxes.
Understanding this is really important when it comes to planning for retirement. You can read more about retirement accounts and their affects here – Retirement Accounts
🚒 FICA – Social Security & Medicare
When you are actively working, you are responsible for 2 types of taxes.
- Income Tax
- Social Security & Medicare
Social Security & Medicare –
Also known as FICA (Federal Insurance Contributions Act)
The government designed this to give retirees something for years of service to the American economy. This is a bit of a more in depth topic, but here are the basics –
- Social Security is 6.2%
- Medicare is 1.45%
- Total rate is 7.65%
- This is the rate paid by the employee (which you will see on your paycheck)
- Your employer is responsible for matching this on their side.
- If you are Self Employed, you pay both.
- The government does set a maximum amount or CAP that you have to pay this % on.
- For 2025, that amount is $176,100. Income above that is not subject to FICA (With some additional smaller taxes for high income earners)
Understanding the above will give you the foundation you need to understand more tax related topics and learn how to become more tax efficient. It does not cover everything – Additional Medicare Tax & Net Investment Tax to name two. It will allow you to grasp additional topics we cover next.
🤔 Parting Thoughts
As always, thanks so much for reading! If you enjoy reading, please share these articles with anyone (subscribe here) that you feel might benefit.
If you have any additional questions, please reach out. We help individuals and businesses year-round with personal and business tax services.
Thanks,
– Taxman