Bear market, explained

Q

I hear the stock market entered a “bear market” — how is that determined? — C.M., Cincinnati A It’s all a matter of degree. When the stock market’s overall value drops (from its high point) by 10%, that’s considered a “correction,” suggesting that the market had gotten ahead of itself and has self-corrected. When the overall value falls by 20% or more, that’s a bear market.

Bear markets can last from weeks to years, so money you’ll need within a few years shouldn’t be held in stocks. As a long-term investor, you can wait for the recovery that (historically speaking) always follows. You might even buy more stock while prices are low. Q If I’m in the 22% tax bracket, I’m not paying 22% on all my income, am I? — P.Z., online A Not at all. That’s your “marginal” tax bracket, meaning that your next dollar of income will be taxed at that rate. Federal tax brackets change over time, but for the 2019 and 2020 tax years, there are seven; they tax income at 10%, 12%, 22%, 24%, 32%, 35% and 37%.

So if you’re single and your taxable income for 2019 is $55,000, you’d pay 10% on your first $9,700 of income (that’s $970), 12% on your income from $9,701 to $39,475 ($3,573), and 22% on your income from $39,476 to $55,000 ($3,415). (That 22% bracket covers income up to $84,200, by the way.) Add those three sums, and they come to a total tax of $7,958. Divide that by your taxable income of $55,000, and you’ll see that you paid 14.5% of your income in federal taxes. That’s your effective tax rate, reflecting your total taxation, and it’s more meaningful than your marginal rate.