# ARTICLE: Before you add a second income Consider the following tax table for 2018 supplied by www.irs.gov:

 Tax Rate Taxable income, Single Taxable income, Married Filing Jointly 10% \$0 – \$9,525 \$0 – \$19,050 12% \$9,526 – \$38,700 \$19,051 – \$77,400 22% \$38,701 – \$82,500 \$77,401 – \$165,000 24% \$82,501 – \$157,500 \$165,001 – \$315,000 32% \$157,501 – \$200,000 \$315,001 – \$400,000 35% \$200,001 – \$500,000 \$400,001 – \$600,000 37% \$500,001 or more \$600,001 or more

First a simple example:

Let’s say you’re filing as Single with \$10,000 of taxable income.  Reviewing the first two columns above, \$9,525 of the income will be taxed at 10%, and the remaining \$475 will be taxed at 12%. The math is:

• (\$9,525 x 10%) + (\$475 x 12%) = total tax due
• \$952.50 + \$57.00 = \$1,009.50
• Effective tax rate = \$1,009.50/\$10,000 = 10.1% (NOT the marginal rate of 12%)

This is intuitive, as the large majority of the income is taxed at 10%, with only those dollars over \$9,525 taxed at 12%.

Now a more complicated example:

Let’s say you’re Married Filing Jointly with \$80,000 of taxable income.  While people may call this “the 22% tax bracket,” the effective tax rate is much lower.  The math here is:

• (\$19,050 x 10%) + [(\$77,400-19,051) x 12%] + [(\$80,000-77,401) X 22%] = total tax due
• (\$19,050 x 10%) + (\$58,349 x 12%) + (\$2,599 x 22%) = total tax due
• \$1,905 + \$7,001.88 + \$571.78 = \$9,478.66
• Effective tax rate = \$9,478.66/\$80,000 = 11.8% (NOT the marginal rate of 22%)

This is also intuitive, as most of the income falls within the 12% marginal rate, with some in the 10% rate, and a small amount in the 22% rate.

So what does this all mean?

• Added income will fall into a new, higher, marginal tax bracket, but that does NOT mean the ENTIRE income is taxed at that higher rate.
• If a married couple with one income making \$270K adds a second income of \$50K, the marginal rate on the last dollars does indeed go from 24% (the marginal tax rate on \$270K) to 32% (the marginal tax rate on \$320K), but remember only a small amount of the new income and an even smaller amount of the total income – the dollars over \$315,001 in this case -  will be taxed at that 32%.
• Upon review of the “marginal versus effective” tax concepts, you may conclude “going into the next tax bracket” is not as material as you may have originally thought.