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let’s say I make over $500k, the income tax in US is 37% I was just wondering, does that mean the 37% (which is $185k) is just lost?

So a person would give almost half their income to the government and that’s it, it’s gone?

I’m a bit new to income tax especially in US and Google brings up information not relevant to my question.

Thanks.

EDIT: Okay I got what you’re saying, I’ve got enough information on this.

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    How do you think you roads, schooling, trash collection and all other government services are paid for? It's not gone, there's a set of things you're paying for. Commented Apr 11, 2019 at 6:35
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    At low incomes it turns into a net benefit in many 1st world countries as you get social security, medical care etc and there are a lot more people in that category than those in the $500k pa category. Commented Apr 11, 2019 at 6:41
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    I see your profile says you are based in Cyprus; a google search suggests to me that Cyprus also has a progressive personal income tax system with a maximum rate of 35% on incomes over 60 K euro. The details are different but the high level concept should be familiar.
    – user662852
    Commented Apr 11, 2019 at 14:21
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    @RobertLongson But those are great examples of things that aren't paid by income tax... roads come largely from fuel taxes, local schools and trash collection come from property and sales taxes...
    – user71659
    Commented Apr 11, 2019 at 20:30
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    @RobertLongson The US does not work like the UK. There is no general block grant mechanism. City and county functions are largely paid for by their own taxation. Very few cities and counties have an income tax, as I said, they are funded via property and local sales taxes. The purpose of this is to offer different taxation rates and government services so that citizens can choose what they desire.
    – user71659
    Commented Apr 11, 2019 at 21:46

2 Answers 2

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The US has a progressive tax system where as your income increases, the amount of tax on that additional income increases. It does not mean that you pay your highest Federal income tax rate on everything that you make.

For an individual, the brackets are:

  • 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

For someone with a taxable income of $35K, the tax rate would be 10% on the first $9,525 and then 12% on the rest. I leave it to you to calculate the tax due on $185k.

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    Also note that there is a standard deduction of $12,000 (or $24,000 for married filing jointly), so effectively the first $12,000 (or potentially more if one's itemized deductions is higher) is taxed at a rate of 0%, and then the next $9,505 would be at 10%, and so on.
    – user102008
    Commented Apr 11, 2019 at 13:05
  • There are lots of things that go into computing your taxable income from your gross income; the standard deduction is just one. Suffice it to say that the brackets apply to your taxable income, and computing your taxable income is an entirely separate question.
    – chepner
    Commented Apr 23, 2019 at 18:58
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It's important to know that not all income is taxed in the US, there are a host of deductions that can reduce taxable income. At the minimum most individuals would benefit from the standard deduction of $12k (or $24k if married filing jointly). If someone earns $500k and donates $200k to charity, they don't pay income tax on $500k of income, they pay on $300k of income because charitable contributions are deductible.

Next, as Bob already pointed out, it's a progressive tax system, so if you had $500k of taxable income you'd pay $150,689.50, which is actually 30.1% tax rate. You would however be taxed 37% on each taxable dollar over $500k.

We also have a host of tax credits, some of which are refundable, that basically count as tax dollars paid. For example if I owed $6k in income tax but spent $20k to buy solar panels for my house last year then I'd qualify for a $6k solar tax credit and I'd now owe $0 income tax.

One more bit is that we have different tax rates for different types of income. We have capital gains which are taxed at different rates than ordinary income depending on how long you held the capital that you sold for gain. So if you sell stock/property for a gain it isn't necessarily taxed the same as income from your job.

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