2024 & 2025 Tax Brackets Breakdown
January 15, 2025
As the anxiety for the tax filing season approaches, we want to answer your questions and address the common misconceptions regarding tax brackets. Let’s dive into the mechanics of tax brackets and answer the following questions: How do tax brackets actually work? What is the difference between a marginal tax rate and an effective tax rate? What part do tax brackets play with long-term capital gains?
How your tax bracket is determined
The United States uses a progressive income tax to tax its citizens. In practice that means that the tax rate will grow as taxable income grows. The ultimate decider of your tax bracket is your taxable income. Let’s use a basic example: let’s say someone makes a gross salary of $70,000, is a Single filer, and their standard deduction is $14,600. Assuming the individual has no other deductions or income, they would have a taxable income of $55,400. Using the chart below, a single filer with taxable income of $55,400 would fall into the 22% tax bracket. That means that the taxpayer pays a 22% tax on that income, right? Wrong. Let’s address a common misconception of tax brackets. 
Addressing a common misconception
When one looks at the tax brackets it appears on the surface that making more money may actually be a bad thing. There is a common fear that being in a higher tax bracket means that one will take home less money. That is incorrect. Let me be clear, in regard to income tax, you do not take home less money by moving into a higher tax bracket. Let’s dive into why that is the case.
What is the difference between a marginal and an effective tax?
There are two tax rates that are extremely important when it comes to your tax return. The marginal tax rate and the effective tax rate. The marginal tax rate is the amount of taxes one will pay on their next dollar of income. The effective tax rate is the amount of tax you actually pay on your taxable income. How does that work with our taxes?
The marginal rate is the tax rate you see listed on the tax brackets. You pay the marginal tax rate on the income designated in each bracket. Using our previous example, let’s see how that looks in practice:
The 1st bracket $0 - $11,600 would be taxed at the 10% rate. --- $11,600 x 10% = $1,160
The 2nd bracket $11,601 - $47,150 would be taxed at the 12% rate. --- $35,549 x 12% = $4,266
The 3rd bracket $47,151- $55,400 would be taxed at the 22% rate. --- $8,249 x 22% = $1,815
In totality, the income tax paid on $55,400 of taxable income would be $7,241. From here we can determine our effective tax rate by dividing our income tax calculated above, by our taxable income. Here is the calculation: $7,241 / $55,400 = 13.07%.
In summary, don’t be afraid of the next tax bracket. If that left column continues to look scary, remember that in our example the marginal rate was 22% while the effective tax rate was actually only 13.07%.
Update to the tax brackets
Now that we have made it to 2025, we have received an updated tax bracket to use as we plan for the future. (see image below)
You may have noticed that in this image there is a column relating to Long-Term Capital Gains. That is because the tax brackets are used to calculate capital gains taxes.
How do tax brackets affect capital gains?
Capital gains are a little bit trickier because the rate you pay is not only determined by your tax bracket, but also by the time the gains are realized. For investments that are bought and sold within 1 year, any gains are taxed at the ordinary income rates (first column); however, if the investment is held for greater than one year, then the gains are taxed at the Long-Term Capital Gain rates (second column). The big lesson to learn with capital gains is that the long-term rates are much more favorable than the ordinary income rates.
In the end I hope you have a better understanding of how tax brackets work, the difference between the marginal and effective tax rates, and the role that tax brackets play with capital gains. Please contact us with any questions you may have. Larson and Company has developed a suite of services specifically to serve the needs of companies of all sizes in a wide range of industries.
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