How Taxes Reduce Your Income: With Examples (2026)
Your gross income is not what you keep. Whether you earn a salary, receive a bonus, sell investments, or withdraw retirement funds, taxes reduce your money in different — and often surprising — ways. This guide shows exactly how each type of income is reduced, with concrete before-and-after examples.
On this page: Salary · Bonuses & windfalls · Investment income · Retirement withdrawals · Why it matters · FAQs
Salary vs take-home pay
A salary is reduced by several tax layers before it becomes spendable cash. The table below uses the same 2026 assumptions as this site's dedicated paycheck pages: single filer, $16,100 federal standard deduction, no pre-tax payroll deductions, employee FICA, and California's 2026 withholding baseline where applicable.
| Tax Layer | $75k in Texas | $75k in California | $100k in Texas | $100k in California |
|---|---|---|---|---|
| Federal income tax | ~$7,670 | ~$7,670 | ~$13,170 | ~$13,170 |
| FICA (Social Security + Medicare) | ~$5,738 | ~$5,738 | ~$7,650 | ~$7,650 |
| State withholding / payroll program | $0 | ~$4,195 | $0 | ~$7,029 |
| Estimated take-home pay | ~$61,592 | ~$57,397 | ~$79,180 | ~$72,151 |
| % of gross kept | ~82.1% | ~76.5% | ~79.2% | ~72.2% |
California's additional amount above includes estimated PIT withholding plus 1.3% SDI. These are planning estimates, not a tax-return calculation; credits, benefits, retirement contributions, local taxes, and withholding elections can change actual pay.
The IRS confirms the 2026 single-filer standard deduction and federal brackets in its 2026 tax inflation adjustments. Employee Social Security and Medicare rates are listed in IRS Publication 15, while California publishes its current SDI rate and withholding guidance.
The combined effect of these layers is explained in detail in federal vs state vs payroll taxes. For a plain-language explanation of why your effective federal rate can be lower than your top bracket, see effective tax rate explained.
Bonuses, severance, and windfalls can follow different tax rules
A cash bonus or many severance payments are generally wages, so the amount is ultimately included with your other wage income. What often looks different is withholding: when an employer separately identifies supplemental wages, federal withholding can use the 22% supplemental rate in 2026 (with special rules for amounts above $1 million).
On a separately paid $15,000 bonus, a simple federal payroll illustration is shown below, assuming the employee is still below the 2026 Social Security wage base and has not reached the Additional Medicare Tax withholding threshold:
- Federal supplemental withholding at 22%: ~$3,300
- Employee Social Security + Medicare at 7.65%: ~$1,148
- Cash before state/local withholding or other deductions: ~$10,552
That 22% is a withholding method, not a special final "bonus tax rate." Your actual federal income tax is reconciled on the return using total annual taxable income. State and local withholding can also apply.
A windfall is broader than a bonus and should not be assumed to be ordinary wage income. Lottery and gambling winnings are generally taxable; settlement treatment depends on what the payment replaces; and inherited cash or property generally is not federal income merely because you inherited it. Use the specific tool that matches the payment type instead of applying a bonus-withholding percentage to every lump sum.
Source: IRS Publication 15 (2026) for supplemental-wage and FICA withholding rules.
Investment income isn't taxed like paychecks
Investment income follows different rules from wages, and the result depends on the asset, holding period, basis, and your other taxable income:
- Long-term capital gains: gains on many capital assets held for more than one year can qualify for 0%, 15%, or 20% federal rates.
- Short-term capital gains: gains on assets held one year or less are generally taxed at ordinary federal income-tax rates.
- Qualified dividends: can qualify for the long-term capital-gain rate structure when the requirements are met.
- Crypto: selling or exchanging investment crypto can create a capital gain or loss, while staking, mining, compensation, and other receipts can create ordinary income before any later disposition.
A $20,000 gain does not automatically mean a fixed amount of tax. A 15% planning-rate example would imply $3,000 of federal capital-gains tax, but the actual rate depends on total taxable income and the character of the gain. State taxes and the 3.8% Net Investment Income Tax can also matter for some taxpayers.
Retirement withdrawals & early additional tax
Traditional 401(k) and IRA distributions are generally included in ordinary income to the extent they represent untaxed contributions and earnings. A distribution before age 59½ can also face a 10% additional federal tax unless an exception applies. The income-tax portion is progressive, so multiplying the whole withdrawal by your top marginal bracket is only a rough planning shortcut.
Example: assume a single filer already has $100,000 of 2026 gross ordinary income and then takes a fully taxable $40,000 early distribution. Using the 2026 federal brackets and standard deduction:
- Federal income tax before the withdrawal: ~$13,170
- Federal income tax after adding the withdrawal: ~$22,334
- Incremental federal income tax from the withdrawal: ~$9,164
- 10% additional tax if no exception applies: $4,000
- Combined incremental federal cost: ~$13,164 before any state tax
Qualified Roth distributions can be tax-free, while nonqualified Roth distributions and accounts containing after-tax basis require more detailed treatment. For early distributions, account type and the specific statutory exception matter.
Why after-tax thinking matters
Financial decisions based only on gross numbers can be misleading:
- A $90,000 Texas salary is about $72,145 after estimated federal tax and employee FICA under the site's 2026 baseline, while a $95,000 California salary is about $69,210 after the comparable California PIT/SDI estimate.
- A separately paid $15,000 bonus can have about $4,448 withheld for federal income tax and employee FICA before state/local withholding or other deductions.
- A $40,000 early traditional-account withdrawal layered on top of $100,000 of other gross income can add roughly $13,164 of federal income tax plus additional tax under the assumptions above.
- Holding a capital asset longer than one year can change a gain from short-term to long-term treatment, but the actual rate still depends on the rest of the return.
In each case, the gross number is only the starting point. For a broader overview of how before-tax and after-tax figures differ, see before vs after taxes explained.
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Related guides and calculators
- Before vs after taxes explained Clear examples of how gross income becomes net income across common scenarios
- Gross vs net income Full breakdown of every deduction from gross pay to take-home
- Effective tax rate explained Why your effective rate is always lower than your top bracket
- Marginal vs effective tax rate Which rate to use for budgeting vs evaluating a raise or bonus
- Federal vs state vs payroll taxes How the three tax layers combine on every paycheck
- Take-home pay calculator Full after-tax breakdown for any salary — all 50 states, 2026 brackets
How taxes reduce income: FAQs
Why is my take-home pay lower than my gross salary?
Gross salary is before taxes and payroll deductions. Under a simple 2026 single-filer example, a $75,000 Texas salary is about $61,592 after estimated federal income tax and employee FICA. The comparable California estimate is about $57,397 after adding estimated California PIT withholding and 1.3% SDI. Benefits, retirement contributions, credits, and withholding choices can move your actual paycheck above or below these estimates.
Are bonuses taxed more than salary?
A cash bonus is generally wage income, but the withholding method can make the paycheck look different. Separately identified supplemental wages can use a 22% federal withholding rate in 2026, while your final federal income-tax liability is calculated from your total annual taxable income. Withholding is a prepayment, not a separate final bonus-tax bracket.
Why do investment gains feel taxed differently?
Capital gains use different rules from wages. Gains on many assets held more than one year can qualify for long-term capital-gain rates, while short-term gains are generally taxed at ordinary federal rates. Basis, losses, total taxable income, state tax, and possible Net Investment Income Tax can also change the result.
Why can early retirement withdrawals cost more in tax?
A taxable traditional IRA or 401(k) distribution adds ordinary income to the year, and a distribution before age 59½ can also face a 10% additional federal tax unless an exception applies. Because income tax is progressive, the best estimate considers the withdrawal together with your other income rather than multiplying the entire distribution by one marginal rate.
Do taxes depend on location?
Yes. Federal income tax and federal payroll-tax rules are national, but state income taxes, local income taxes, and state payroll programs vary. Under this site's 2026 benchmark, a $100,000 Texas salary is about $79,180 after estimated federal tax and employee FICA, while the comparable California estimate is about $72,151 after California PIT withholding and SDI. Use the state take-home comparison tool for planning.
Examples are for illustration only and are not tax advice. Actual outcomes depend on your personal situation and local laws.