Curious about how tax brackets affect you and which tax bracket you fall into?
I mean who hasn’t scratched their head once or twice trying to figure out which tax bracket you fall under. Deep breaths, you got this!
In order to understand your tax bracket placement, you must first understand how the income tax system works.
The U.S. uses what’s called a progressive tax system for income taxation. In other words, the more money you make, the more tax you will pay; the less money you make, the less tax you pay. Sounds simple, right? Well, yes and no.
Let’s take a closer look.
WHAT ARE TAX BRACKETS?
Tax brackets show you the amount of the tax rate you will be on at each portion of your income. The U.S. progressive tax system currently has seven different tax brackets rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Why? Because each portion of your income is taxed at a different rate.
For example, you have a taxable income of $50,000.00 and your filing status is single, you would fall into the 22% bracket. The lowest rate of 10% would then be applied to the first $9,875.00 of your income; followed by the 12% for the income between $9,875 and $40,125. The 22% rate is only applied to the amount of income that is earned over $40,125.00.
However, once your income exceeds a certain threshold, you are moved into a higher tax bracket. Any additional dollars earned are taxed at the higher rate. Keep in mind that your filing status does determine how much you can earn before you move up to a higher bracket.
But remember if you move to a higher bracket, that rate is not applied to all of the income you earned.
This progressive system makes sure that everyone is paying the same rate of taxable income at the same level. Overall this leads people with higher incomes to pay higher taxes.
The fact that you’re making more money doesn’t mean that you will be penalized at the higher rate. There is a way to reduce your taxable income and lower your tax bracket. What is it? DEDUCTIONS!
CAN DEDUCTIONS HELP LOWER YOUR TAX BRACKET?
The answer is yes. Deductions are a great way for you to reduce your taxable income. This means that less of your income is taxed in the higher brackets. That is good news! Here are some deductions you can look into:
Contribute to an IRA or 401(k);
Higher Education Credit;
Mortgage Insurance Premium;
Open a Health Savings Account;
Self-employed Business Expenses;
State and Local taxes;
Earned income tax credit.
The abundance of information out there can leave you even more confused especially with percentages, ratios and taxes. But you don’t have to go it alone. The best thing to do is to reach out to a tax professional.
We are here to help guide you along the way!
Have any questions? Feel free to drop a comment here or send me a DM. I’m happy to help!