How to Calculate Income Tax
Income tax is calculated on a progressive (graduated) basis — not all your income is taxed at the same rate. Instead, different portions of your income fall into different 'brackets' and each bracket is taxed at its own rate. This means a higher income does not mean all your income is taxed at the higher rate — only the portion above each threshold is. Understanding this prevents the common misconception that earning more can leave you with less take-home pay.
Last updated: March 31, 2026
The Formula
Taxable Income = Gross Income − Deductions Tax = Σ(income in each bracket × bracket rate) Effective Rate = Total Tax / Gross Income × 100 Marginal Rate = rate applied to your last dollar of income
Variable Definitions
| Symbol | Name | Description |
|---|---|---|
| AGI | Adjusted Gross Income | Gross income minus above-the-line deductions like IRA contributions and student loan interest |
| Taxable Income | Taxable Income | AGI minus the standard deduction (or itemised deductions if higher) |
| Marginal Rate | Marginal Rate | The tax rate on your last dollar of income — NOT the rate applied to all your income |
Step-by-Step Example
Single filer with $75,000 gross income, taking the standard deduction ($14,600) for 2024.
Given
Solution
- 1First $11,600 taxed at 10%:
$11,600 × 0.10 = $1,160 - 2Next $35,550 ($11,601–$47,150) taxed at 12%:
$35,550 × 0.12 = $4,266 - 3Remaining $13,250 ($47,151–$60,400) taxed at 22%:
$13,250 × 0.22 = $2,915 - 4Sum all bracket taxes:
$1,160 + $4,266 + $2,915 = $8,341 - 5Effective tax rate:
$8,341 / $75,000 × 100 = 11.1%
Total federal tax ≈ $8,341. Effective rate = 11.1%, even though the marginal rate is 22%.
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Common Mistakes to Avoid
Applying the top bracket rate to all income — only the income within each bracket is taxed at that rate.
Confusing marginal rate with effective rate — your effective rate is always lower than your marginal rate.
Forgetting the standard deduction — reduce gross income by the deduction before applying brackets.
Ignoring FICA taxes (Social Security 6.2% + Medicare 1.45%) — these are separate from federal income tax.