A Simple Example Pulling It Together

Meet an illustrative person: they earn $80,000 in salary from their job (earned income), plus $4,000 in dividends and interest from investments (other income) over the year, for $84,000 in total income. Using this level's bracket structure — 10% to $15,000, 20% to $45,000, 30% to $100,000, 37% above $100,000 — all of it falls under $100,000, so no income reaches the 37% bracket.

To keep this example simple, imagine this illustrative system taxes both income types the same way, using the same brackets — remember, some real systems draw a distinction here, but plenty of the underlying logic works the same either way. Here's the full calculation.

Total income: $84,000  ($80,000 salary + $4,000 investment income)

Tax owed:
  10% x $15,000 = $1,500
  20% x $30,000 = $6,000
  30% x $39,000 = $11,700
  --------------------------
  Total tax = $19,200

Marginal rate: 30%  (the rate on the last dollar earned)
Effective rate = $19,200 / $84,000 = about 22.9%
Take-home: $84,000 - $19,200 = $64,800

In the example, the illustrative person's marginal rate was 30% while their effective rate was about ____%.

Why didn't any of this illustrative person's income get taxed at the 37% bracket?

In this example, the $4,000 of investment income was simply added to total income before applying the brackets.

Every concept from this level shows up in this one example: brackets determining how each slice is taxed, a marginal rate that's higher than the effective rate actually paid, and two different income types combining into one total. That's the real skill this level builds: being able to look at any income picture and reason through what's actually happening, rather than guessing.