Federal taxes affect all of us- we notice our smaller paychecks, or we’re wondering we’re going to get a refund or not, or if we’re doing bookkeeping for our small business. It’s something we need to be on top of.
Taxes don’t have to be mysterious thing that you think about a few times a year. Arming yourself with information can help you sort through common questions people have for the upcoming tax season. What are income taxes exactly? What’s your tax bracket? How does income tax brackets work?
What your Taxable Income?
When people hear income taxes they usually believe that their entire income is being taxed. That’s not always the case. When filing your returns, you’ll see that there’s taxable income that calculated. The IRS and the Department of Treasury define what taxable income is.
Basically taxable income breaks down to:
Gross Income (all income earned/received) – Tax Deductions
You can start see why getting the most deductions you qualify for is a big deal. These deductions lower your taxable income, therefore you keep more of your money and pay less taxes.
Income Taxes Brackets
We have a progressive tax system in the United States. As income increases, at certain points, the tax rates will go up for any income over those amounts. In the US, your tax bracket is determined by your filing status and your income.
There are five filing statuses you can use:
- Married, Filing Jointly
- Married, Filing Separate
- Qualifying Widow(er)
- Head of Household
Currently the U.S. tax brackets for ordinary income are 10%, 15%, 25%, 28%, 33%, and 35%.
How do you know how much you’re taxed? How do tax brackets for an individual? Running the numbers can help out.
How Does Income Tax Brackets Work?
People have heard stories where people have gotten a raise and actually received less money in their paycheck. They wonder then, how exactly do the tax brackets work?
I’ll show you with an example to shed some light on the situation.
Let’s say you’re filing as a single person and your income for the year was $50,000. Here’s how it looks tax-wise:
- ($ 8,375 minus 0 ) x .10 : $ 837.50
- ($34,000 minus 8,375 ) x .15 : $3,843.75
- (50,000 minus 34,000 ) x .25 : $4,000
Total Tax Due (before tax deduction): $ 8,681.00
Even though $8,000 is a big chunk of change, you may notice that even though this person was in the 25% tax bracket, their actual tax rate is less than that. If you qualify for tax deductions, it’s even less than that amount. That’s why it pays to find out what you qualify for as you file your taxes.
Thoughts on Federal Taxes
I’d love to hear your thoughts. Are you prepared for the upcoming tax season? What is your biggest question on federal taxes?