The Tax Bracket Cliff That Doesn't Actually Exist
Earning more money doesn’t mean you take less home, regardless of what you may have heard. Moving into a higher tax bracket means you are making more money, not less, even if your tax rate might increase.
Here’s how the federal tax brackets actually work, plus a real-life example.
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Tax Brackets Are a Staircase, Not a Cliff
There are seven IRS tax brackets for 2026, ranging from 10% to 37%. A single filer moves from the 10% bracket into the 12% bracket at $12,400 of taxable income, into 22% at $50,400, into 24% at $105,700, and so on up to 37% above $640,600.
When you move into a higher tax bracket, only the last dollar you earned gets taxed at the higher rate. Income that you earned below that level remains unaffected.
A Real Example
If you’re a single filer earning $105,700 in 2026, you’ll be right at the top of the 22% tax bracket. If you earn an additional dollar, you’ll find yourself in the 24% bracket.
But that $1 in incremental income doesn’t suddenly make the first $105,700 you earned taxable at the 24% rate. It simply means that the last dollar you earned is taxable at 24% instead of 22%, meaning you keep 76 cents of it instead of the 78 cents you kept of the prior dollar. The net impact is that you will pay an additional 2 cents in taxes.
This is why it doesn’t make any sense to say that you don’t want to earn more income since you will only “end up in a higher tax bracket.” You still earn more money, you just keep less of the extra money that you earn.
Nobody has ever taken home less money by earning one additional dollar under the federal income tax system.
Tax Brackets and Actual Tax Rates Are Two Different Things
Your tax bracket is also known as your marginal rate. It’s the tax rate you pay on your last dollar of income.
Your effective tax rate is the blended rate you earn on your entire income, taking into account the different amounts you pay on different slices of your income.
IRS Statistics of Income (SOI) data makes this clear. For the 2023 tax year, the most recent year for which information is available, the bottom half of all filers paid an average effective rate of just 3.7%. The top 1% of earners paid roughly 26.3%.
Both of those rates are far below the top tax bracket of 37%. That’s because even high earners have some of their income taxed at lower brackets along the way.
Where the Real Tax Cliffs Exist
There are some IRS income limits that do result in cliff-like consequences. For example, if you earn even $1 more than the limit for the Income-Related Monthly Adjustment Amount, you’ll pay higher rates for Medicare for a full year, according to the Centers for Medicare & Medicaid Services (CMS).
But none of those have anything to do with the core federal income tax brackets. If you’re worried that a raise or bonus is going to actually reduce your take-home pay, that fear is unfounded.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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