Tax brackets are one of the most misunderstood yet foundational concepts in U.S. financial planning. Whether you’re earning a salary, running a business, or managing cross-border income, understanding how your income is taxed is essential for making informed decisions, especially for NRIs balancing U.S. obligations with global assets.
What Are Tax Brackets?
The U.S. tax system is progressive, meaning your income is taxed in layers. Each layer corresponds to a specific tax rate. As your income increases, only the portion that falls into the next bracket is taxed at the higher rate—not your entire income.
Common Misconception: Many people believe that entering a higher bracket means all their income is taxed at that rate. In reality, only the income within that bracket is taxed more.
The 2025 Federal Tax Brackets (Single Filers)
Here are the official brackets for 2025:
A Simple Example
Let’s say the brackets look like this:
- 10 percent on income up to $10,000
- 12 percent on income between $10,001 and $40,000
- 22 percent on income between $40,001 and $90,000
If you earn $50,000, here’s how your tax liability breaks down:
- First $10,000 taxed at 10 percent = $1,000
- Next $30,000 taxed at 12 percent = $3,600
- Last $10,000 taxed at 22 percent = $2,200
Total Tax = $6,800 Effective Tax Rate = 13.6 percent
Even though you reached the 22 percent bracket, most of your income was taxed at lower rates. This layered structure is key to planning income, deductions, and retirement contributions.
Why This Matters on Your Journey
Knowing your tax bracket gives you clarity and control. It helps you:
- Plan for raises or side income
- Use deductions and retirement accounts wisely
- Avoid surprises at tax time
In short, it keeps more money in your pocket and your financial journey on track.
The Next Chapter: From Brackets to Buckets
If tax brackets tell you how your income is taxed today, tax buckets show you how your assets will be taxed tomorrow. Buckets help you organize your money into categories—taxable, tax deferred, and tax free—so you can control how much tax you pay in retirement.
This next step is where strategy meets structure. We’ll explore how to use tax buckets to accelerate your journey toward financial freedom.