Every year, you have to file your tax returns. What this means is that you calculate your taxable income, which is a certain value. This value reflects how much you earned and how much of that will be taken by the government. How the IRS tax bracket works is that, the more you earn, the more you pay in taxes. That said, there are some variables associated with this as well, including what your status is (single, married filing jointly, married filing separately, qualifying widow(er), or head of household). The tax brackets are expressed as percentages, which are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
Understanding How the IRS Tax Bracket Works:
Where it gets confusing, however, is that you only pay the higher percentage on the income that you earn above the lower percentage threshold. For instance, 10% is paid by single people who earn up to $9,275. If they earn $9,276, they move into the 15% tax bracket. This does not mean that they pay 15% over their full income, however, but only on that one dollar more. They will continue to pay 10% over the first $9,275. So, if you are a single person in the highest, 35% bracket, which means you earn at least $415,051, you will pay 39.6% on everything above $415,051, 35% on what you earn between $413,351 and $415,050, 33% on what you earn between $190,151 and $413,350, 28% on what you earn between $91,151 and $190,150, 25% on what you earn between $37,651 and $91,150, 15% on what you earn between $9,276 and $37,650, and 10% on anything you earn below $9,275. So yes, you can be in multiple tax brackets at the same time.
Why You Need to Understand How the IRS Tax Bracket Works:
What everybody wants to do is keep as much disposable income as possible, which means not paying too much in taxes. Hence, you must gain a full understanding of the brackets and its benefits because:
– High income earners can make lucrative tax deductions, because of the higher percentages.
– Any tax withheld from your pay is based on the rates and brackets. The IRS provides this information, basing it on what you earn and how many dependents you have. These are "deductions". This means that your employer knows how much money they should withhold to pay for your taxes. But if you claim for fewer dependents, for instance, your taxable income will suddenly rise.
– If you earn "extra" income, you have to pay the higher rate on it. This is why, when April comes around, people often have to pay a bit more on their taxes.
Are taxes confusing? Absolutely. But by gaining an understanding of them, you can also make sure that they work in your favor. Taxes should be paid, as they help the government run all the services that we need. But we also all want to keep as much money as possible in our own pocket.