Do you know what tax bracket you are in, and what this means for you? Basically, if you want IRS tax brackets explained, it means that you need to know how much you have to pay in tax for each dollar you earn. It is not, however, what you pay on your full income after exemptions, deductions, and adjustments. Rather, it shows how much more you pay for every additional income dollar.
Getting Through the Complexity with IRS Tax Brackets Explained:
The IRS has created tax brackets to reflect the progressive system of income tax. In other words, the more you earn, the more tax you pay. This is progressive and linked to your income. Basically, if you earn a lot, you are expected to be able to afford a lot more as well. If you don't earn a lot, you don't just have to pay less money, the percentage you pay is smaller as well.
The exact calculations depend not just on your income, but also on your status, which adds to the complexity. Hence, IRS tax brackets explained is perhaps best achieved through an example. Let's say you are single, have no children, and earn $10,000 in taxable income. This means that you are on the lowest rate, which is 10%, which means you pay $1,000 in taxes.
But now let's say you earn $20,000, putting you in the 15% bracket. That doesn't mean that you will pay 15% over everything that you earn. Rather, you pay 15% over everything you earn above the 10% threshold, and 10% over everything below that.
Furthermore, the applicable federal income tax bracket vary depending on whether you are a single filer, a married person who files jointly, a married filer who files separately, a qualifying widow(er), or a head of household. Furthermore, the tax brackets are changed every year, so it is also important that you apply the correct ones, depending on which year you are filing for.
Tax Bracket Myths:
There are a lot of untruths about tax brackets to know about as well. For instance, just because you earn more money does not mean you will end up in a higher tax bracket and therefore actually have less disposable income. That is because the higher rates are only applied on the proportion of income you earn that is above the lower rate threshold. What this means, in other words, is that you can pay taxes in multiple, even in all, tax brackets. If, for instance you are in the 28% bracket, you will pay some tax on 28%, some on 25%, some on 15%, and some on 10%. Hence, even if you do start to earn more, you will always end up with more disposable income as well.
However, the more you earn, the fewer tax benefits you can have access to. For instance, those at a higher income level will not be able to access education credits anymore. This is why you should really understand what your tax rate is, and which benefits come with that, so that you can better understand what you earn, and what you pay.
For instance, you may want to earn a little bit more and do some overtime for it. Perhaps you want to earn an extra $1,000. However, if you are in the 25% tax bracket, you will actually only earn an extra $750, because you have to pay tax on that. Plus, you have to pay for your Social Security and your Medicare. All in all, around a third of that overtime money will actually go towards taxes.
You can look at it differently as well. For instance, you can make contributions that are tax exempt, although this means that you have to itemize your deductions. For instance, if your income falls in the 25% bracket, and you contribute $100 to exempt plans, you save $25.