20 Jan How Do I Determine My Tax Bracket and Tax Rate?
Taxes are used for the overall well-being of society and economic growth. They help us afford services such as public safety, national defense, education, protect the environment, and distribute wealth by increasing the tax on luxury items and sin taxes on cigarettes and alcohol. Knowing how much to pay in taxes, what your tax rate is, and your tax bracket can get confusing. So let’s discuss how you can determine them.
Determining Your Tax Bracket
The taxes that the government will require from you starts out as your gross income. After using your tax credits, tax exemptions, and tax deductions that can be reduced from the total that you will owe. That total then becomes your taxable income, a percentage of that amount the IRS will come knocking for. That percentage is then broken down into brackets. Those brackets are your tax brackets, which are also called marginal tax rates.
It has been a common wrong assumption that you would need to pay that percent of your total taxable income to the IRS if you are at a certain percentage bracket. For example, if you are at the 22% rate, you would have to pay 22% of your total, or at 37%, and 37% of that would go to your taxes. That is not correct. Your tax bracket is broken down into ‘brackets,’ hence the name. Each bracket has a different percentage rate so that you will not pay the same rate for your entire total.There are seven brackets, 10%, 12%, 22%, 24%, 32%, 35% and 37%. As your
income increases, it progresses down the bracket and increases in percentage. This is referred to as progressive taxation.
Determining your Tax Rate
So how will you know what your tax rate is? First, you will need to determine your tax filing status. There are four:
2. married filing jointly
3. married filing separately
4. head of household
You then need to determine your gross income minus tax adjustments based on your tax filing status. Let’s say that your total is $50,000 in taxable income for 2020. That puts you in the 22% tax bracket for earners of $40,125 – $85,525. Now, remember, that does not mean you will be paying 22% of the $50,000. You take your $50,000 and subtract it from $40,125, which will come to $9,875, and multiply that by 10%, that will be your first bracket, which will total $987.50.
The second bracket, minus the 40,125 and the $9,875 equals $30,250, and get 12% of that amount, to come up with $3,630. The third and last bracket, minus the $50,000 and $40,125 which is $9,875, 22% of that is $2,172.50. Then you add the three totals, which becomes $6,790 that you will need to pay. By dividing the total of $6,790 and the $50,000, you come up with your 14% tax rate. Another easier way is to check line 10 of your 1040 Form from your last filing and make needed adjustments from there.
If you have any questions on other kinds of support you can get when it comes to your taxes, we invite you to contact the Golden Tax Relief team.