Every new year begins with filing taxes. Based on your reported income, expenses, investments, and withholdings, the IRS determines whether you have sufficiently paid your share. If you’ve underpaid, then you’ll have to cover the difference and make a payment to the IRS.
On the other hand, if you’ve overpaid, you’ll be entitled to a tax refund. While this may seem like a better scenario, it’s important to note that you’ll have lost any potential interest you could have earned on that overpayment throughout the year. As such, your goal should be withholding as close to the correct amount as possible. What is the best way to estimate what that amount is going to be?
The Importance of Tax Brackets
In the United States, the IRS uses a method referred to as “tax brackets” to help determine how much a person will owe in taxes. Determining your rate of taxation can be complex because it changes based on multiple factors. There is no flat percentage that applies to all filers. Instead, the IRS separates people into categories, and each category gets its own tax rate.
All of this information is included in the tax bracket for the applicable taxable year. To facilitate the process, the IRS makes these brackets available as online resources on their website. Those preparing to file their taxes can simply look through the table to determine what percentage of their income they’ll owe for the year.
Finding Your Tax Bracket
To utilize the table, there are two pieces of information you must know ahead of time: your total taxable income and your filing status. The IRS makes distinctions between those filing singly, married and jointly, married but separately, and as head of household. In addition, there are also distinctions made for various levels of income.
There is one more step involved in assessing tax brackets that makes the process a little more complicated than you might think. At a glance, it might seem like you could simply look at the highest tax rate listed for your total taxable income and apply that to your annual taxable income. However, doing so might actually lead to an over calculation of your tax liability.
Tax brackets are what is referred to as a progressive tax system. This means that the higher the income, the higher the tax rate. However, that doesn’t apply to the entirety of your income, only the portions that belong in higher brackets. Each portion of your income is taxed in accordance with its category on the table. This means that portions of your income could be subject to the lowest rate for the current tax year as determined by the IRS.
Get Help With Determining Your Tax Bracket
Tax brackets can seem daunting at first, but with practice, they can help you make sense of your tax rates. For more assistance in determining what your tax rates are or for general information about filing your taxes, contact Western Shamrock today.
Resources:
https://www.aarp.org/money/taxes/info-2020/income-tax-brackets.html
https://www.irs.gov/pub/irs-pdf/i1040tt.pdf
