When it comes to filing your taxes, there are many important factors that you need to take into consideration. One good example of these are tax brackets. In the United States, we function on what is known as a progressive tax system. In this framework, your income is actually viewed in different proportions. Each of these separate parts gets taxed at a certain rate.
Why Are They Important?
Brackets are how we can best represent how the progressive form of taxation works. The more you make, theoretically, the “higher” your bracket (there are plenty of other circumstances that affect this and that’s why this statement is not a hard and fast rule).
Brackets change regularly which is why you need to refresh your knowledge every year before filing your taxes. This is true for both state and federal tax brackets. If you’re not aware of the rates at which you’ll be taxed, your expectations of what your tax refund or tax liability will be simply won’t be accurate. Also, keep in mind that even if the brackets haven’t changed, your income may have - meaning you’ll still be paying a different amount.
Let’s take a look at a quick example. In 2013, a single person would have paid a 10% tax on the first $8,700 they made. That was just the first portion of their income that was being taxed. The next chunk incurred a 15% tax and so on and so forth. The obvious implication of the system is that those who make more pay more.
We don’t have room here to go into each of the income tax brackets in this article. Plus, by the time you read this, the rates may have changed already anyways (please refer to the table below for the latest rates). However, it is important to know that the tax associated with each bracket differs depending on your filing status. Filing statuses include:
- Single Taxpayers
- Married Filing Jointly and Surviving Spouses
- Head of Household
- Married Filing Separately
You may recall earlier when I mentioned that there were some extenuating circumstances that make it impossible to generalize about brackets and how they work. A large part of this challenge has to do with deductions. As we all know, there are certain parts of your income that you can essentially claim as exempt from taxes. By doing so, your taxable income drops and you may very well fall down a bracket or two. One good example would be charitable contributions, but even taking your standard deduction also has a measurable impact.
While a lot more could be said on the subject of brackets and how they’ll affect your tax return this year, this introduction should supply you with a basic foundation to understand how they work. You can always leave the rest to the experts at Lank, Johnson & Tull, CPAs and their cutting edge Advantage Tax Preparation service.