When you file your taxes, federal tax brackets decide the percentage of your income taxed by the government. These brackets range from 10% to 37% and depend on your income and filing status (e.g., single, married filing jointly, or married filing separately). Each category has its own set of brackets, ensuring that taxpayers are charged fairly based on their earnings.
What is Taxable Income?
Taxable income is the part of your earnings that the government considers taxable. This includes your salary, investment returns, and other income sources like business profits or retirement withdrawals. To accurately calculate your taxes, you need to know what makes up your taxable income.
Reducing Taxable Income with Deductions and Credits
One of the easiest ways to lower your tax bill is by using deductions and credits. Deductions allow you to subtract specific expenses, like mortgage interest or charitable donations, from your taxable income. On the other hand, credits directly reduce the amount of tax you owe. For example, a $1,000 tax credit reduces your tax bill by $1,000, making it even more valuable.
Steps to Calculate Your Taxes
1. Start with Your Total Earnings
Your gross income is the total amount you earned in a year. This includes wages, business income, dividends, capital gains, and retirement income. Gross income is the starting point for figuring out your tax obligations.
2. Adjust Your Income
The IRS lets you reduce your income legally through adjustments, resulting in your adjusted gross income (AGI). Common adjustments include:
- Student loan interest
- Retirement contributions (e.g., traditional IRA)
- Teaching-related expenses
By lowering your AGI, you reduce the portion of your income subject to tax.
3. Choose Standard or Itemized Deductions
Source: Bench
After adjusting your income, decide whether to take the standard deduction or itemize. The standard deduction is a fixed amount based on your filing status, while itemized deductions let you claim specific expenses like medical bills, mortgage interest, or charitable donations. Since the 2017 Tax Cuts and Jobs Act, more taxpayers opt for the larger standard deduction.
Using Tax Brackets to Determine Tax Rates
Federal tax brackets apply different rates to portions of your income, known as marginal tax rates. This means not all your income is taxed at the same rate. For instance, if your taxable income is ₹50,000, you might pay 10% on the first ₹9,950, 12% on the next portion, and so on.
| Tax Rate | Single Filer | Married Filing Jointly or Qualified Widow | Head of Household | Married Filing Separately |
|---|---|---|---|---|
| 10% |
$0 to $9,950 |
$0 to $19,900 |
$0 to $14,200 |
$0 to $9,950 |
| 12% |
$9,951 to $40,525 |
$19,901 to $81,050 |
$14,201 to $54,200 |
$9,951 to $40,525 |
| 22% |
$40,526 to $86,375 |
$81,051 to $172,750 |
$54,201 to $86,350 |
$40,526 to $86,375 |
| 24% |
$86,376 to $164,925 |
$172,751 to $329,850 |
$86,351 to $164,900 |
$86,376 to $164,925 |
| 32% |
$164,926 to $209,425 |
$329,851 to $418,850 |
$164,901 to $209,400 |
$164,926 to $209,425 |
| 35% |
$209,426 to $523,600 |
$418,851 to $628,300 |
$209,401 to $523,600 |
$209,426 to $314,150 |
| 37% |
$523,601 or more |
$628,301 or more |
$523,601 or more |
$314,150 or more |
Tax Credits: A Key to Lowering Taxes
Tax credits directly reduce the taxes you owe, making them a powerful tool. There are two types of tax credits:
- Refundable Credits: If the credit exceeds your tax bill, you get the extra amount as a refund.
- Nonrefundable Credits: These can reduce your tax bill to zero but do not provide refunds for any leftover amount.
Popular tax credits include:
- Child Tax Credit
- Earned Income Tax Credit (EITC)
- American Opportunity Tax Credit (for education expenses)
- Retirement Savings Contribution Credit
Source: MSN
The Role of Tax Tables
Tax tables simplify the process of figuring out your tax liability. These tables match your taxable income range with the applicable tax rate, helping you calculate the exact amount you owe. Tax tables are especially helpful for those filing taxes manually.
Important Documents for Filing Taxes
To file your taxes, you’ll need specific forms, such as:
- W-2 Form: For salaried employees, showing your total earnings and tax deductions.
- 1099-MISC Form: For freelancers or self-employed individuals, detailing income from clients.
Additionally, keep records of deductions and credits you qualify for, like charitable donations or child tax credits. Proper documentation ensures accurate filing and helps you claim all eligible benefits.
Capital Gains and Investment Income
Investors who hold stocks for over a year can benefit from long-term capital gains tax rates of 0%, 15%, or 20%. However, higher earners may face an extra 3.8% net investment income tax. Understanding these rates helps you plan your investments wisely.
Conclusion
Filing taxes may seem complicated, but breaking the process into manageable steps makes it much easier. By understanding federal tax brackets, taxable income, and the impact of deductions and credits, you can minimize your tax liability and maximize your refund.
Using tax tables and maintaining proper records ensures accuracy and helps you stay compliant with IRS rules. With a clear strategy, you can take control of your taxes and make informed financial decisions year-round.
This article has been carefully fact-checked by our editorial team to ensure accuracy and eliminate any misleading information. We are committed to maintaining the highest standards of integrity in our content.
Filza specializes in simplifying financial topics for everyday readers. Whether breaking down Canada’s tax guides or U.S. benefits like SNAP and VA Disability, Filza’s relatable writing style ensures readers feel confident and informed. Follow her insights on LinkedIn or reach out via email at shewrites.health@gmail.com.
