Tax Brackets
Last updated April 2, 2023
This page gives a brief overview of how tax brackets and a general philosophy to follow when trying to minimize your tax burden.
Federal Tax Brackets
The 2022 federal tax brackets for single filers are below. I copied this from this article on nerdwallet so I can use these numbers in my examples, but it should be easy enough to find a similar table for whichever tax year is relevant for you.
| Tax rate | Taxable income bracket | Tax owed |
|---|---|---|
| 10% | $0 to $10,275. | 10% of taxable income. |
| 12% | $10,276 to $41,775. | $1,027.50 plus 12% of the amount over $10,275. |
| 22% | $41,776 to $89,075. | $4,807.50 plus 22% of the amount over $41,775. |
| 24% | $89,076 to $170,050. | $15,213.50 plus 24% of the amount over $89,075. |
| 32% | $170,051 to $215,950. | $34,647.50 plus 32% of the amount over $170,050. |
| 35% | $215,951 to $539,900. | $49,335.50 plus 35% of the amount over $215,950. |
| 37% | $539,901 or more. | $162,718 plus 37% of the amount over $539,900. |
Philosophy
Because tax rate increases with income, to minimize the overall amount we pay in taxes over our lifetime, we would prefer to have relatively consistent levels of taxable income over the course of our life, rather than years of high earnings (working years) and years of low earnings (retirement). A key thing to consider when trying to minimize your tax burden is what you can do to keep your income level relatively consistent rather than having it fluctuate so some years are higher earning than others.
This philosophy comes into play when deciding what types of retirement accounts are best for you, and also when deciding the best time to sell investments and realize capital gains.
Example
If you will earn $1,000,000 over the course of ten years, and you could choose to earn it split evenly ($100,000 per year) or unevenly ($180,000 the first five years, $20,000 the remaining 5 years). Assuming the tax brackets stayed the same over the course of those ten years, earning the income unevenly would result in paying an extra $21,295 in taxes over those ten years.
$100,000 per year:
This puts you in the 24% tax bracket, so (referencing the table above): 15,213.50 + (100,000 - 89,075) * 0.24 = $17,835.50 per year
Which means you would pay a total of $178,835 over 10 years. Additionally, any additional income you had each year would be taxed at a 24% rate.
$180,000 per year for 5 years, then $20,000 per year:
$180,000 puts you in the 32% tax bracket, so (referencing the table above): 34,647.50 + (180,000 - 170,050) * 0.32 = $37,831.50 per year
$20,000 puts you in the 12% tax bracket, so (referencing the table above): 1,027.50 + (20,000 - 10,275) * 0.12 = $2,194.50 per year
In this case you would pay a total of $200,130 over 10 years. Additionally, any additional income you had each year would be taxed at a 32% rate for the first 5 years, and 12% rate after that.
State taxes
Each state defines separate tax laws. Massachusetts has a flat income tax rate of 5% for the 2022 tax year, which must be paid in addition to the federal taxes. Because Massachusetts has a flat tax rate, if you live in Massachusetts it does not make a difference for state taxes whether you earn your money consistently year-to-year or if your income level fluctuates.