As tax time comes around again, there is the feeling of mystery that seems to accompany the realm of tax brackets. Questions surround how your tax bracket is determined and what that means in terms of taxes you have to pay. Yet the answer to these questions is based in the type of tax system employed in the United States. For specific questions about your individual tax bracket and rate, speak with your tax professional or accountant, such as Allan J. Rolnick in Forest Hills, NY.
The United States uses a progressive tax system, which means that different portions of your income will be taxed at different rates. For those with higher incomes, this usually translates into a higher taxable income.
Tax brackets are essentially a physical representation of this system, indicating how much tax has to be paid at a variety of income levels. These brackets, as well as the rates, do change from time to time. Therefore, it is important to work with your tax professional, as they will have the most current tables for filing your taxes.
As you examine the current table, you can find out the tax rate you will be paying on the various portions of your income. For a single individual, the lowest tax rate of 10% is applied for the first $8,700 of your income. The next portion of income will be taxed at 15%. If you make more than that top amount, you will continue to go up in tax levels until you reach the top of your actual income.
This system is meant to insure that everyone pays the same rate of tax at the same levels of income. The overall effect is that those with the highest incomes will end up paying the highest tax rate.
So how does this all combine to determine how much you pay in taxes? One way to look at it is through the lens of your effective tax rate. This is essentially an average of all the tax rates that apply to your income. The tax you will pay on the last dollar of your taxable income will be greater than your effective rate.
An example of this is an individual who had half their income taxed at 10%, but the rest was taxed at 15%. Their effective tax rate is 12.5%. This means that essentially 12.5 cents of every dollar of your income earned will have to be paid in taxes.
The IRS has determined there will be seven different tax brackets for the 2015 filing. These brackets have tax rates of 10, 15, 25, 28, 33, 35 and 39.6 percent. However, before you determine what bracket you fall into, your tax professional will determine how much taxable income you have and your filing status. Both of these will also play a part in determining how much tax you will actually pay.
Deductions also play a part in reducing your taxable income, thus making it possible to avoid having more income taxed at the higher income rates. This is particularly true for individuals with higher income. For instance, if you only made $30,000 in taxable income, then the most you will pay is 15 percent in taxes on a portion of your income. So working to achieve a $2,000 deduction will ultimately only save you about $300. But for those in the 35 percent income bracket, that same $2,000 deduction will provide a $700 savings.
Therefore, the higher your income, the more deductions you should see if you qualify for. Working with your tax professional, you might be able to find deductions that you had previously overlooked, but that would assist in bringing down your taxable income even further.
Now that we have a rough idea what tax bracket we will be falling in, you need to make sure that you are withholding enough taxes from your regular income to cover your tax liability. After completely your W-4, the IRS supplies your employer what the tax rates for you should be based on what your salary is and the number of dependents you are claiming. Thus, you should always make sure to update your W-4 after a life change that alters your dependents, so your employer can take out the right amount of tax, thus making sure you have adequately covered your tax liability.
Click on the link below to connect with one of the professional at Allan J. Rolnick in Forest Hills, NY, who can assist you in determining what your effective tax rate is!
Allan J Rolnick, CPA, CTC