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Happy Friday! The cold weather and snow in the Midwest have definitely made February feel extra long. Or maybe it just feels that way after a month full of tax talk. Luckily, tax season is almost behind us, and as we close out the month, it’s starting to feel a bit more like spring.

Fun fact: Did you know the first federal income tax in the U.S. was introduced during the Civil War? It was enacted in 1861 to help fund war efforts. Taxes have been a financial battle ever since! 

TODAY ON REASONED REFLECTIONS:

• Personal finance articles 💰;

• Reflection No. 24;

• Time to reflect;

• Quote of the Reflection.

Personal Finance Articles 💰

Time for a bit of R&R

• Roths are the best!

  My Take - Roth accounts are hands down one of the best retirement vehicles out there. What I love most? No RMDs means more flexibility in how and when you withdraw your money. Plus, with tax-free withdrawals in retirement, you’re setting yourself up for lower taxes and more control over your income down the road.

• Tax savings

  My Take - Someone at Fidelity must have been reading Reasoned Reflections! Just kidding. But seriously, tax loss harvesting is a smart strategy for offsetting capital gains and reducing taxable income. By strategically selling investments at a loss, you can use those losses to balance out any gains you made during the year. 

• Inflation fears

  My Take - Inflation fears can wreak havoc on the stock market. But if you’re investing for the long haul and retirement is still decades away, take a page from NSYNC and “Buy, Buy, Buy.”

• Home sales decline

  My Take - With interest rates staying high and home prices continuing to climb, more potential homebuyers are being forced to sit on the sidelines. And honestly, I don’t see these two factors easing up anytime soon.

• Points or cash?

  My Take - After January’s theme on credit cards and travel hacking, you might be wondering: When should I use cash, and when should I use points? There’s no one-size-fits-all answer, but this article does a good job of breaking it down. Personally, my strategy has evolved over time. I used to burn points as soon as I earned them, then shifted to hoarding them, and now, with brands constantly devaluing rewards, I’m leaning toward redeeming sooner rather than later.

TOGETHER WITH MONEY.COM

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FIND PROTECTION

Looking ahead!

We’re talking about budgets?! Come next week, Reasoned Reflections is all about budgets. I know, I know… budgeting has a bad reputation. People think it’s restrictive, but I’d argue the opposite. Budgets are more freeing than not—instead of wondering where your money went, you get to decide where it goes.

With so many budgeting methods out there, we’ll look at a different approach each week so you can find one that works for you.

Reflection No. 24: Progressive Taxes

I - Issue: What’s a progressive tax system? 

R - Rule: A progressive tax system increases tax rates as income rises. It includes different tax brackets, where everyone pays the same rate on the first portion of their earnings, but higher income is taxed at progressively higher rates.

A - Analysis: Before diving into how the progressive tax system works, let’s first look at some history of income taxes in the United States. 

History

1872

In the early days of the United States, there was no income tax. Imagine that! However, during the Civil War, the government introduced an income tax in 1862 to help fund the war effort. At that time, a 3% tax was imposed on incomes between $600 and $10,000, and a 5% tax on any amounts over $10,000. However, this first income tax was repealed in 1872. 

1913

In 1913, the 16th Amendment gave Congress the power to tax income.

The initial tax brackets were:

• 1% on income up to $20,000

• 2% on income from $20,000 to $50,000

• 3% on income from $50,000 to $75,000

• 4% on income from $75,000 to $100,000

• 5% on income from $100,000 to $250,000

• 6% on income from $250,000 to $500,000

• 7% on income over $500,000

All taxpayers paid the same rate whether single, married, or heads of households.

At the time, fewer than 1% of Americans paid income taxes.  

Progressive Taxes

A progressive tax means that lower-income individuals pay lower tax rates, and higher-income individuals pay higher rates. The U.S. currently has seven tax brackets—10%, 12%, 22%, 24%, 32%, 35%, and 37%. 

Comparatively, today’s tax rates are quite low. In the 1950s and 1960s, the highest marginal tax rate was over 90%. By the 1970s, the top rate dropped to 70%; in 1982, it was further reduced to 50%.

Tax Brackets

As mentioned earlier, the U.S. currently has seven tax brackets. For ease, the following table includes the different brackets and income levels for single taxpayers in 2024.

A common misconception is that if you fall into a higher tax bracket, all of your income is taxed at that rate. However, each portion of your income is taxed only at the rate assigned to that bracket. 

Let’s break it down with an example:

JP earns $50,000 in 2024. JP’s marginal tax rate is 22%, but that does not mean he pays 22% on all $50,000. Instead, his taxes are calculated like this:

• 10% on the first $11,600 → $1,160

• 12% on the portion between $11,601 and $47,150 → $4,266

• 22% on the portion between $47,151 and $50,000 → $627

• Total tax = $6,053

This is far less than if JP simply multiplied his $50,000 salary by 22% ($11,000).

C - Conclusion: While tax rates have changed over time, the U.S. has relied on a progressive tax system since income taxes were first introduced. The system ensures that tax rates increase as income rises, but only the portion of income within each bracket is taxed at that rate.

Time to Reflect…

It’s kind of wild to think that income taxes have only been around in the U.S. for a little over 100 years. Before Congress had the power to tax income, the federal government relied on excise taxes to generate revenue taxing everything from tobacco and alcohol to gunpowder.

Quote of the Reflection