One question we often get asked is how do tax brackets work. A lot of people aren’t sure how income is taxed and how to determine which tax bracket they actually fall into. Taxpayers are often confused by how their income tax is calculated and then they don’t understand why they owe more money than they thought. Tax brackets, unfortunately, are confusing to those who don’t deal with taxes every day. Here’s what a lot of people need to know when it comes to income taxes and tax brackets.
One thing you need to understand is that not all your income is taxed in the same bracket. For example if you make $100,000 a year, you fall into the 24% tax bracket. That doesn’t meant your $100,000 in income is all taxed at 24%. Tax brackets work almost like a ladder. Part of your income is taxed at each step and with each step the tax on your income increases. For 2019, the tax brackets are as follows for single filers:
- 10% tax rate for $0 to $9,700.
- 12% tax rate for $9,701 to $39,475
- 22% tax rate for $39,476 to $84,200
- 24% tax rate for $84,201 to $160,725
- 32% tax rate for $160,726 to $204,100
- 35% tax rate for $204,101 to $510, 300
- 37% tax rate for $510,301 or more
So, for example, let us say you are a single filer making $75,000 a year from your salary job. We won’t add in tax credits or deductions for this example, but those can lower your taxable income and lower the tax bracket you are in.
With a salary of $75,000, you fall into the 22% tax rate bracket. Does this mean all your salary is taxed at 22%? No, only a portion. Of that $75,000, the first $9,700 is taxed at 10%. That leaves $65,300 in income left to tax. The next portion of your income from $9,701 to $39,474 is taxed at 12%. That means $29,775 is getting taxes at 12%. So far, we have taxed $39,475 of your income. Next, we tax the remainder of your income from $39,476 to $75,000 at 22%. That means $35,524 of your income is getting taxed at 22%. So, your income tax for each bracket comes to $970 plus $4,736.88 plus $7,815.28. This means you will pay $13,522.16 in income taxes for 2019. This is a bit lower than if you taxed the full income at 22% like some people try to do to guess their taxes. If you taxed the full income at 22% you would think you were paying $16,500 in income taxes.
If you have multiple streams of income, you need to realize, it is taxed altogether, not separately. The IRS looks at how much total income you have received in the tax year and that is how it determines your tax bracket. So, if you earn $75,000 from your salary job, but earn $25,000 a year in pension or other income, then you will move up a tax bracket. You will then earn $100,000 a year total. You can use the same process to figure out how much taxes you will owe total for all your income.
The income tax brackets work as a tiered system, not a flat tax percentage on all your income. So, when you hear you’ve moved up a tax bracket, don’t be scared. It doesn’t mean you’re going to lose more money, it just means the portion of money you’ve earned over your previous tax bracket will be taxed at a higher rate.
If you need help figuring out what you owe in taxes or need help paying off the taxes you do owe, Polston Tax can help! Our team of tax attorneys and tax accountants can guide you through the tax brackets and how you can save money through tax deductions or credits. Give us a call at 844-841-9857 or click below to schedule your free consultation.