Meet Max. Max is an unmarried tax filer with no children. He’s a simple man with a simple income tax story. And it goes like this:

Max makes $50,000 per year at his job. For now, let’s ignore details like withholding, deductions, and whether or not he finds his work fulfilling.

When Max receives his W-2 form, it reports that he earned $50,000 of wages in 2018. So he’s on the hook for that amount. This is his **total income**.

### Meet the Standard Deduction

But wait! Max can subtract $12,000 from his taxable income. In fact, most U.S. taxpayers can subtract $12,000. This is the **standard deduction**.

“$12,000 of tax-free income? Amazing!”

You gotta love $12,000 of tax-free income, courtesy of the standard deduction. And if Max were to get married, he and his spouse’s combined standard deduction would be $24,000.

Look at it this way: If Max only made $12,000 at his job, the standard deduction would zero out his taxable income. In that case, Max would pay *nothing* in federal income tax!

But luckily for Max, he earned $50,000, not $12,000. So let’s get back to the story of his simple tax return.

Max prepares his tax return and enjoys the standard deduction very much. Like magic, his $50,000 turns into $38,000 of **taxable income**. And that becomes the amount he’ll pay tax on.

### Meet the Tax Brackets

Next, Max needs to determine how much tax he’ll pay on his $38,000 of taxable income. For that answer, it’s time to introduce the **tax brackets**.

“More like Max brackets! Am I right?”

Good one! Anyway, the table below shows the **2018 tax brackets for individuals**—that is, anyone who’s *not* married. And that includes Max. Married couples are subject to a different set of tax brackets.

Rate | Taxable Income |

10% | Up to $9,525 |

12% | $9,526 to $38,700 |

22% | $38,701 to $82,500 |

24% | $82,501 to $157,500 |

32% | $157,501 to $200,000 |

35% | $200,001 to $500,000 |

37% | over $500,000 |

Notice how the percentages increase on higher amounts of income. This is a **progressive tax system**. So the more income Max has, the more that *additional* income is taxed. That’s how we do it in the United States.

“U-S-A! U-S-A!”

Anyway, the tax brackets define how much tax Max must pay on different *parts* of his 2018 taxable income.

The percentages in the first column don’t change unless there’s a change in the tax law, as there was recently. But the taxable income amounts in the second column adjust each year for inflation.

Remember that Max’s taxable income is $38,000 after the standard deduction. Now let’s apply that amount to the tax brackets, one part at a time.

### Meet the Total Tax

According to the tax brackets, Max pays **10% on his first $9,525** of taxable income. That’s $952.50 of income tax.

But Max still has $28,474 of income he needs to pay taxes on ($38,000 – $9,525). That remaining amount is taxed at the next rate, which is 12%.

So, Max pays **12% on $28,475**, which is another $3,417 of income tax.

Max’s **total income tax is $4,369.50** ($952.50 + $3,417). This number is more important than how much Max owes or has refunded when he files his taxes. When everything shakes out, this is **how much he paid in federal income taxes** in the calendar year.

### Meet the Tax Rates

If we divide the tax Max paid by his income ($4,369.50/$50,000), we learn that Max paid 8.79% on his $50,000. This is called his **effective tax rate**.

Don’t confuse this with **marginal tax rate**, which is the tax on each *additional* dollar earned. Max’s marginal tax rate is 12%. So if he earned $50,001, that extra $1 would be taxed at 12%. Bye-bye, 12 cents.

“Does that mean Max pays 12% tax on all his income?”

Not all of Max’s income is taxed at his marginal rate. Remember that $12,000 of his income is tax-free, thanks to the standard deduction. Then $9,525 of his income is taxed at 10%. Finally, the remaining $28,474 of income is taxed at his marginal rate of 12%.

If we slice Max’s total income into a delicious pie chart, it looks like this:

### Conclusion

An effective tax rate of 8.79% seems harmless on the surface. But $4,369.50 of total tax is a lot of money to Max. It’s a big, ugly, annoying number, even if it doesn’t look so bad when it’s spread across paychecks. It would be nice if Max could somehow avoid some of this tax.

Taxes can—and do—get *way* more complicated than this scenario. But the good news is there are many legal ways to pay less tax that *aren’t* very complicated. **It’s important to know how you’re taxed, and how much you pay, so you can make informed decisions to avoid tax.** That’s what this series is about.

In Part 2 of this tax series, we’ll look at Max’s pre-tax deductions. And we’ll explore how he could lower his total tax with some basic tax avoidance techniques.

*Disclaimer: The author is not a tax professional and is not providing tax advice. Do your own research and talk to a professional before making any tax moves.*

Abigail @ipickuppenniesAlas, my taxes are more complicated thanks to rental income, or my life (around tax time) would be much simpler. Ah well, at least I get the rental income during the year. Now if only the upgrades/repairs hadn’t cost me almost as much as I got in rent this year… But there’s always 2019rent, right?

Upwardly FrugalOh yeah, real-life tax situations tend to get complicated. But too few Americans understand the very basics of how income taxes work. I used to be one of them! But that’s great that you have rental income. It sounds like profits are just around the corner!

GovWorkerFIHey! This is a great series on helping people understand taxes. It’s especially timely now that it’s tax season!

Upwardly FrugalThanks, Mr Fig! Indeed, it’s tax season and I hope to publish Part 2 very soon.