It's Not About The Money

Tyler: Steve, I had the coolest
experience this week with one of

my clients that I'm working with.

Um, it's actually a couple,
husband and wife couple.

They are brand new clients.

Um, they were working on one of the
first things that we do together,

which is kind of listing out all their
expenses and how often they occur, how

much they are, et cetera, et cetera.

And they actually sent me over.

Before our first session, this like
giant spreadsheet, kind of a template

for the budget they wanted to create.

And I was honestly so jealous.

It's like better than any budget
I've ever created in my life.

And I know that's subjective.

Yeah.

Maybe I shouldn't say it's better.

Cause like, what's, what
does that even mean?

Right.

There's no such thing.

Yeah.

But like, they just thought of
things that I hadn't thought of

before that made me so happy.

And I really don't think it's
for everyone, but they're very

kind of particular and they've
broken things down in certain ways

that, that, that work for them,

Steve: I'm intrigued.

Tell me about this.

Tyler: like one example, um, is
the way they've handled their

food categories in their budget.

So like, I'm pretty basic in my
budget, because I like to keep things

simple, but relatively granular.

If that's an oxymoron, I'm sorry.

Welcome to my life when it comes to

Steve: just enough detail to be useful,
but not so much that it gets out of hand.

Tyler: Yeah, it's got to be easy.

It's got to be easy or else
I'm not going to do it.

Right.

So anyway, I've typically just divided
my food categories into two, groceries

and eating out, because those are
pretty different activities for me.

And I kind of want to
monitor those differently.

Like I would prefer spending more
on groceries and less on eating out.

In reality, not always the case,
but, uh, but they added a couple of

different categories that I really liked.

One was like social eating.

So that would be like going
to dinner with friends.

Steve: Yeah.

Tyler: with someone, going to dinner
with another couple, that kind of stuff.

And they, they track that even separately
than like just take out for the family.

I thought that was kind of cool.

And yeah, so they've got, uh, like
groceries, convenience food, and that for

them is like eating out, fast food, take
out for the family, that kind of stuff.

Steve: Okay.

Tyler: Um, and then, like I
said, Like, uh, social eating.

I just, I don't know.

That was kind of cool.

I liked that a lot.

Steve: That is a good idea.

Tyler: And so that's something
I actually stole from them

and I put into my own budget.

So I added, I added a new category
in my budget called Meals on Me,

which I think is kind of fun.

Cause that's just like, I do like to go
out to lunch with people and like every

once in a while, I think it feels, it's
great to like buy lunch for someone

to be like, "Hey, let's go to lunch.

It's on me."

You know, I think

that that's something that I would,
you know, I like doing that, I would

like to do more of it, but I've never
called it out as a separate thing

that's important to me in my budget.

And so.

That always comes out from my
just regular eating out budget,

which it can burn through pretty
quickly if, if that's happening.

Right.

So anyway, there was a lot of
cool, other cool stuff in here.

I just love being inspired by my clients.

They're kind of my heroes
and they do cool stuff.

And I just wanted to share that, I guess.

Steve: Oh, that's really lovely.

Hello there, dear listener, I am Steve.

Tyler: And I'm Tyler, and this is another
episode of It's Not About The Money, where

we discuss a wide range of topics related
to creating and running small businesses.

Steve: Tyler and I are both small
business owners like you, and this

podcast is our attempt to make sense
of the world one episode at a time.

Tyler: And as you know, if you've
listened to any of our episodes about

taxes, I've had so many opportunities
to prove and demonstrate my ignorance

on this topic, which is why I'm glad
we've got Steve here on the show.

And today we're talking about one of, I
feel like, the most basic and yet perhaps

commonly misunderstood Topics for regular
people like me, which is tax brackets.

We want to have Steve
demystify those for us.

Yeah.

Steve: Yeah, they sound
scarier than they are.

It seems like, you earn more money
and then you're, you get bumped

up into the next tax bracket.

And that's, can be like
a, an onerous possibility.

Tyler: Yeah.

You know, I remember, I think I
mentioned in a previous episode,

I actually was on like the
borderline of tax brackets one year.

And I asked my, my tax professional,
like, is it ever good to like not earn

more money because like, then wouldn't
have to pay more in taxes if I bump.

So I think, I mean, maybe I'm
extra dumb, but that could be

a common concern people have.

I'm not sure.

I've had it.

I'll just throw that out there.

Steve: yeah, and it is, uh, that
the common term tax bracket makes

it easy to envision it that way that
how the IRS actually refers to them

as marginal rates and the marginal
word is important And I'll explain

here in a second what that means, but
it's not it's not as bad as it sounds

Tyler: That sounds
worse than tax brackets.

Cause I have no idea what it means.

Steve: Well, yeah that

Tyler: So enlighten us, enlighten us.

Yeah.

Steve: okay fair enough.

I am guilty of using accounting
terminology, which is Which sounds?

sounds what difficult for non accountant

Tyler: Little esoteric.

Steve: It's esoteric, yeah.

Tyler: Yeah.

Steve: Esoteric terminology that is
difficult for normal people to understand.

If you're not a nerd
about accounting like me.

Tyler: When I first heard about tax
brackets, what I thought they were

is like, if you make this much money,
if this is your income, and it's

between this range, then this is the
percentage of tax that you pay, period.

Steve: oh yes, uh, that is a very
easy way to understand it, and it is

incorrect, uh, which is why tax brackets
are not not as scary as they seem.

But yeah, that, I, I have also
thought that in my younger days.

So marginal rates, uh, keep the, keep
the word marginal in the back of your

head, and maybe we'll explain it at
the end, or maybe not, we'll see.

Hopefully that, I have a
little analogy here that will

hopefully help this make sense.

Uh, so let's say that you've
got a series of six buckets and

they're, they're, they're getting
a little bit bigger each time.

So the first one is the smallest
and we're going to pin it.

We're going to screw it up
on the wall at the very top.

Tyler: Okay.

Steve: is the lowest tax bracket.

So it's kind of like reversed, but
the lowest tax bracket is at the top

Tyler: Okay.

Steve: because of gravity for my analogy.

It breaks down a little bit.

You'll see it in

Tyler: Keep going.

Keep going.

Steve: Okay, so these six buckets are
kind of stacked on top of each other, up

the wall, with the first bucket being at
the top, and then on the floor we have

a kiddie pool to catch everything else.

Tyler: Big bucket.

Okay.

Steve: Big bucket in the very bottom.

You're going to have your hose
with water running through it.

This is your taxable income.

So at the beginning of the
year, you climb up the ladder.

And start filling up the very top bucket.

Tyler: Start earning money.

Steve: You start earning money and
it can hold, uh, if you're married

filing jointly, the, the numbers
for singles are slightly different.

I'll just use the married
filing jointly numbers for.

Consistency throughout here, the
first bucket can hold 23, 200 in 2024.

Tyler: Okay.

Steve: So you earn all the way
up to 23, 200, 201, it spills

over into the bucket below.

Tyler: Okay.

Steve: That first bucket, you
pay 10 percent tax on all the

money in that first bucket.

Now you're, uh, you're making 23, 201.

You have bumped up to the next bracket.

Which is 12%,

Tyler: Uh huh.

Steve: but you're only paying 12
percent on the water that's in that

bucket, the money that's in the

Tyler: Oh, okay.

Steve: So as you keep filling up from the
top bucket, you're still at the top of

the ladder, filling up from the very top.

Tyler: Uh huh.

Steve: Uh, the second
bucket is filling up.

You're paying 12 percent on all
the money in that second bucket.

And eventually that one fills up.

It spills over to the next one,

So at 94,300, uh, now you're in
the 22 percent tax bracket, but

you're only paying 22 percent
on the money in that bucket.

Everything in the previous bucket was 12%.

10 percent in the top bucket.

Does that make sense?

So here's where the
marginal part comes in.

It's not, it's not now you're
in the 22 percent bracket.

So you're paying 22 percent on everything.

It's just the 22 percent that
was above the last break point.

Tyler: That, that does make sense.

That makes a lot more sense.

And it makes me feel a little bit better.

I'm, I wonder about the brains who
came up with this, but, but yes, it

makes, now I understand why people
can be potentially fans of the idea

of a flat tax, but that's okay.

This is good.

This is good.

This is

Steve: right.

Yeah, the idea is as you make more money,
you pay a larger share of tax on the

money, but only only the extra money
above the the last break off point.

Tyler: Okay.

That makes sense.

Steve: Yeah, anyway, so the tax rates
go up 10, 12, 22, 24, 32, 35, and then

the kiddie pool at the bottom that's
catching everything else is 37 percent

for whatever is above that level.

Tyler: Okay.

Steve: So if you make more money,
you will pay more tax, but just

on the extra money that you made.

Tyler: Yeah,

Steve: still paying the same rates on the,
on the previous money that you earned.

Tyler: Right.

And this is taxable income, so these
deductions that we've talked about in

other episodes and kind of managing
your taxable income through various

ways can help potentially influence
the maximum bucket that you fall into.

Steve: Yeah, that's a very good point.

The, everybody gets the
standard deduction at least.

And so that covers your first,
uh, what is it this year?

29, 200 that you just get to take
back out that part's not taxable.

Tyler: Okay.

Cool.

Steve: And then it kind
of starts from there.

Yeah.

And then any other deductions, or if you
itemize instead of taking the standard

deduction, or you have business income
and expenses, all that kind of, you

know, the stuff we've talked about.

That's the basic idea, so hopefully
that little visual is useful.

Tyler: Yeah, that, uh, that is,
that helped me a lot, actually.

So I've, I've heard this explained
various ways, um, in the past to

the point where I was comfortable
understanding that I wasn't being taxed

such and such percent on all my income.

So that, that's nice, but that I
really liked the bucket analogy of

the water flowing through those.

That's cool.

Yeah.

Thanks, Steve, for explaining that.

Steve: Yeah, you're welcome.

And then at the end of the year,
all the buckets get emptied

out, and you start over again.

At the, at the lowest bracket,
start filling that one up.

Tyler: So.

As you taught me before, it's always
better to earn more money from,

from a tax perspective, even Right.

Steve: Yeah, I mean, more
money is, is more money.

I mean, if you, if more money is better.

Maybe more money is not
better for other reasons, but,

Tyler: if that's important to you.

Yeah, yeah.

Steve: well, yeah.

Sorry, I just, I just, it
depends did you, didn't I?

Tyler: Yeah, you did.

You just, it depends.

Well, I should say there's not
really a penalty for any more

money from a tax perspective.

That's not true either.

. No, but it's not.

I don't

Steve: There's not a penalty on the
money that you already earned if you earn

more.

You could say it that way.

That is true.

A

Tyler: say this, but I'm not,
I'm not doing a very good job.

Yeah.

Steve: A way to say what you want
to say without me walking into

the trap of, Well, it depends.

I'm going to have to stop you right there.

Tyler: Yes.

Yeah.

Which is good.

That's what you're here for.

Keep me in check.

I appreciate it.

Steve: Yeah.

Standing on top of a
ladder with a garden hose.

Tyler: Uh,

Steve: Yes,

Tyler: Sounds safe.

Safe.

Steve: this is something
everyone does, right?

Nailing buckets to the wall,
climbing up on a ladder.

This is the most efficient
way to fill up your buckets.

Tyler: Yeah, exactly.

To fill up your kiddie, the
swimming pool for your kids.

Steve: Yeah,

I mean, you could just as easily
visualize this as you lined the

buckets up along the ground.

And then you're, you're filling
them up in turn, but I like the

idea of, uh, overflowing and
catching into the bucket below them.

Tyler: And there you have it, folks.

Marginal tax rates explained by Steve Nay.

Steve: You're welcome.

You can email us hello at notaboutmoney.

com.

Tyler: And we'll catch
you on another episode.