Tax Bracket vs. Tax Rate - What's The Difference - DM 103
- noemedagatan
- Apr 9
- 3 min read
What is your tax bracket, and what is your tax rate? Hey, it's Jon from Financial MD, welcome to today's Didactic Minute.
We're deep into tax season. If you're watching this fairly after it's released, it's going to be April next month. You've got just about two, three weeks to get your actual taxes done. Now this can change if you're self-employed, if you're an S corp, if there's business owners, but that's another discussion for another time.
So your personal tax return is typically due April 15th or on or about there. If it falls on a weekend, sometimes they'll move it to the 16th or 17th. But in general, let's plan on getting things done a little bit early. There's a lot of organization and document gathering that goes into this.
Quick pro tip: What my wife and I have discovered and what we've been recommending to clients is get the free Google Drive account, which probably most of you already have. Create a folder. Start dropping stuff in there. Get a good scanner. Take pictures, and just as you get it, put it in there, so you don't have this stack coming. You're wondering if you actually got this W-2 or this 1099, and probably, your W-2s and 1099s might be more simple or more complex than other people. So being organized is the first thing.
But then figuring out at the end of the day how much taxes you owe or will get back is the whole point of this. What is your tax rate? What tax bracket are you in? We wonder that all throughout the year. And that's where tax planning comes in -- knowing what tax bracket you're going to tend to be in, what tax rate you actually pay, and why are those different, and what the heck does that mean.
So let's talk about tax brackets. You can see right here on the screen we've got the tax brackets for 2025. I'm not going to show you 2024 because it's over. It doesn't matter. There's nothing you could do about it. Now, 2025, there are several tax brackets. And here's the thing: Your tax bracket is not your tax rate. Write that down, or rewind a little bit and watch this again. Your tax bracket is not your tax rate necessarily because the tax bracket you're in simply means this is your marginal tax rate. This is where the top level of your income will be taxed.
So we've got 10, 12, 22, 24, 32, 35, etcetera, and these could change this year. In fact, it's supposed to sunset this year which, again, another topic for another video. But don't look at your tax rate being in the 24 percent bracket and think that all of my income is going to be taxed at 24 percent. It's not. It's a graduated system. It's blended. So watch as your income goes up throughout the year, as you make money throughout the year, your total income increases and you'll be in different brackets throughout the year. So only segments or portions of your income are taxed at that rate and it becomes a blended rate. And so that means your actual tax rate is going to be lower than your tax bracket. It's kind of an average of the tax brackets that you travel through throughout the year.
So just be aware of that as you're picking out your withholdings, when you start a job on your W-4, as you're looking at your withholdings throughout the year with your financial planner, as you're trying to plan exactly how much you should set aside. Know your tax bracket and know your tax rate. There's some good software out there. If you want to reach out to us and see if you can see some kind of projection or just get an idea what's the right way to do this or get some recommendations, love to help there.
So, shoot us a message below. DM us. Let us know if you want to chat a little bit and get a better idea of how you can be smarter with your taxes because tax prep, which usually you have somebody do or you do through TurboTax, is not tax planning. Tax prep happens one time. Tax planning goes on throughout the year and throughout your whole life.
So, again, it's Jon from Financial MD, we'll see you next time.
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