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 looks like a single number but is reduced by three separate tax layers before you see any of it. Here's what actually happens to a $75,000 and $100,000 salary in Texas versus California (single filer, 2026):
| Tax Layer | $75k in Texas | $75k in California | $100k in Texas | $100k in California |
|---|---|---|---|---|
| Federal income tax | ~$9,918 | ~$9,918 | ~$14,268 | ~$14,268 |
| FICA (Social Security + Medicare) | ~$5,738 | ~$5,738 | ~$7,650 | ~$7,650 |
| State income tax | $0 | ~$4,100 | $0 | ~$6,282 |
| Take-home pay | ~$59,344 | ~$54,800 | ~$76,600 | ~$68,900 |
| % kept | 79% | 73% | 77% | 69% |
Federal and FICA are identical across states — the entire take-home pay difference between Texas and California comes from state income tax alone. California also adds SDI (1.1%). For your exact salary and state, use the take-home pay calculator.
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 rate is lower than your bracket, see effective tax rate explained.
Bonuses & windfalls are taxed differently
Bonuses, severance, and windfalls are ordinary income — taxed at the same federal brackets as salary. But the withholding method is different. Employers use a flat 22% federal supplemental withholding rate for bonuses under $1 million. On a $15,000 bonus:
- Federal withholding at 22% flat: ~$3,300
- FICA (6.2% SS + 1.45% Medicare): ~$1,148
- State tax (California, ~10.23% flat): ~$1,535
- After-tax payout in California: ~$9,017
- After-tax payout in Texas: ~$10,552
The withholding is a prepayment — your actual tax on the bonus is based on total annual income at filing, not the 22% flat rate. If 22% exceeds your effective rate, you receive a refund. For large bonuses, the aggregate method can result in higher withholding if the bonus pushes your combined paycheck into a higher bracket.
Investment income isn't taxed like paychecks
Investment income follows different rules than employment income, and the tax impact depends heavily on timing and income level:
- Long-term capital gains (assets held over 12 months): taxed at 0%, 15%, or 20% — significantly lower than ordinary income brackets for most earners.
- Short-term capital gains (assets held under 12 months): taxed as ordinary income at your marginal bracket — the same as salary.
- Qualified dividends: taxed at the same lower long-term capital gains rates (0%, 15%, or 20%).
- Crypto profits: treated as capital gains — short-term if held under 12 months (ordinary income rates), long-term if held longer.
Selling an investment for a $20,000 gain does not mean you keep the full $20,000. At a 15% long-term capital gains rate, you keep approximately $17,000. At short-term rates in a 22% bracket, you keep approximately $15,600. State capital gains tax further reduces the net, especially in California which taxes capital gains as ordinary income.
Retirement withdrawals & early penalties
Traditional 401(k) and IRA balances are pre-tax — contributions were never taxed. That tax bill is deferred, not cancelled. Withdrawals are taxed as ordinary income at your marginal rate in the year of withdrawal. Early withdrawals before age 59½ also incur a 10% penalty on top of income tax.
Example: $40,000 early 401(k) withdrawal at 22% federal marginal rate:
- Federal income tax at 22%: ~$8,800
- 10% early withdrawal penalty: ~$4,000
- State income tax (California ~8%): ~$3,200
- Net received in California: ~$24,000 (60% of withdrawal)
- Net received in Texas: ~$27,200 (68% of withdrawal)
Roth 401(k) and Roth IRA qualified withdrawals are tax-free, because contributions were made with after-tax dollars. The tax decision between traditional and Roth depends on whether your tax rate will be higher now or in retirement.
Why after-tax thinking matters
Financial decisions based on gross numbers can be misleading:
- A $90,000 job offer in Texas nets more than a $95,000 offer in California after taxes.
- A $15,000 bonus is not $15,000 in your pocket — it's $9,000–$11,000 depending on state.
- A $40,000 early 401(k) withdrawal costs $12,000–$16,000 in taxes and penalties before you see a dollar.
- Selling investments held 11 months vs 13 months can change the tax rate from 22% to 15% on the same gain.
In each case, the gross number is what's advertised. The after-tax number is what you live on. For a broader overview of how before-tax and after-tax figures differ, see before vs after taxes explained.
File your taxes accurately across all income types
- TurboTax — handles salary, bonuses, investments, and retirement income in one return
- FreeTaxUSA — free federal filing, low-cost state return for W-2 and investment income
Affiliate links — we may earn a commission at no cost to you.
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 so much lower than my gross salary?
Because taxes are applied in layers — federal income tax, FICA (Social Security 6.2% + Medicare 1.45%), and state income tax all combine on every paycheck. At $75,000 salary in Texas, total taxes are approximately $15,650 — leaving $59,350 take-home (79%). In California, total taxes are approximately $20,200 — leaving $54,800 (73%). The difference between states comes entirely from state income tax. Use the take-home pay calculator to see your exact breakdown.
Are bonuses taxed more than salary?
Bonuses are taxed at the same federal rates as salary — they are ordinary income. But they are often withheld at a higher rate. The IRS flat supplemental withholding rate is 22% federal for amounts under $1 million, regardless of your actual bracket. This means if your effective rate is below 22%, you'll receive a refund at filing. If it's above 22%, you'll owe the difference. The actual tax rate on a bonus is your marginal rate — not a special bonus tax rate.
Why do investment gains feel taxed differently?
Because they are taxed differently. Long-term capital gains (assets held over 12 months) are taxed at 0%, 15%, or 20% — well below ordinary income brackets. Short-term gains are taxed as ordinary income at your marginal rate. Crypto profits follow the same capital gains rules. This is why holding an investment just one additional month (crossing the 12-month threshold) can significantly reduce the tax rate on the same gain.
Why are early retirement withdrawals penalized?
Traditional 401(k) and IRA balances are pre-tax — contributions were never taxed. Withdrawals are taxed as ordinary income in the year received. Early withdrawals before age 59½ also trigger a 10% penalty on top of income tax. At a $40,000 early withdrawal with a 22% federal rate and 10% penalty, the combined federal cost is approximately $12,800 — leaving approximately $27,200 net before state tax. See the early withdrawal calculator for your exact scenario.
Do taxes depend on location?
Yes — significantly. Federal income tax and FICA are the same in every state, but state income tax ranges from 0% in Texas and Florida to 13.3% top rate in California. At $100,000 salary, a Texas worker takes home approximately $76,600 while a California worker takes home approximately $68,900 — a $7,700 annual difference entirely from state income tax. For a side-by-side comparison, use the state take-home comparison tool.
Examples are for illustration only and are not tax advice. Actual outcomes depend on your personal situation and local laws.