Average Tax Per Dollar Decreases As Taxable Income Increases
It is a well-known fact that taxes are an essential part of our lives. We all pay taxes, and the amount of tax we pay is determined by our taxable income. The taxable income is the amount of money that we earn from all sources, including our salary, business income, investment income, and so on. The more money we earn, the higher our taxable income will be, and the more tax we will have to pay. However, what many people do not know is that the average tax per dollar decreases as taxable income increases.
What is taxable income?
Taxable income is the amount of money that we earn from all sources that is subject to tax. This includes our salary, business income, rental income, investment income, and so on. To calculate our taxable income, we must first determine our gross income, which is the total amount of money we earn from all sources. We then subtract the allowable deductions and exemptions to arrive at our taxable income.
How is tax calculated?
Tax is calculated based on our taxable income and the tax rates that apply to each income bracket. The tax rates are progressive, which means that the more money we earn, the higher the tax rate we pay on each additional dollar of income. For example, in the United States, the tax rate for the first $9,700 of taxable income for a single filer is 10%. The tax rate for the next $29,775 of taxable income is 12%, and so on.
Why does the average tax per dollar decrease as taxable income increases?
The average tax per dollar decreases as taxable income increases because of the progressive tax rates. The tax rates increase as taxable income increases, but not all of our income is taxed at the same rate. Only the income that falls within each tax bracket is taxed at the corresponding rate. For example, if our taxable income is $100,000, only the income that falls within each tax bracket is taxed at the corresponding rate. The first $9,700 of taxable income is taxed at 10%, the next $29,775 of taxable income is taxed at 12%, the next $44,725 of taxable income is taxed at 22%, and so on.
As a result, the average tax per dollar decreases as taxable income increases because the higher tax rates only apply to the income that falls within each tax bracket. The income that falls within the lower tax brackets is taxed at a lower rate, which reduces the average tax per dollar.
Conclusion
In conclusion, the average tax per dollar decreases as taxable income increases because of the progressive tax rates. The higher tax rates only apply to the income that falls within each tax bracket, which reduces the average tax per dollar. It is essential to understand how taxes work so that we can plan our finances accordingly and minimize our tax liability.