Updated: Oct 1, 2020
Intro to Income Taxes:
People pay income taxes on the income they earn. Income taxes are taxes the government puts on income depending on how much money you earn.
US Income Tax Rates 2020 (Taxes due on April 15, 2021)
Tax Rate Single Person
37% $518,401 or more
How Tax Brackets Actually Work:
Through a common misconception, the amount of income you earn does not directly correspond to your tax bracket. For example, if your income is $40,125, you are not directly taxed 12 % of $40,125 (which is $4,815). You are first taxed 10% for the $9,875 ($987.50). Then, you are taxed 12% for $9,876-$40 ($30,250), which would be $3,630. So in total, for an income of $40,125 you would pay $4,617.50. And by dividing this by your income, you get an effective tax rate of about 10.4%.
Getting Into Lower Tax Brackets:
Using tax credits and tax deductions can lower the cost of you tax bill.
Tax credits reduce dollar-for-dollar. For example, if your tax bill was $1000 and you have $100 worth of tax credits, you would only have to pay $900 in taxes. You can get tax credits in a variety of ways. Some ways include adopting a child, having dependents, child care, and elderly care. For more information, visit Investopedia: Tax Credits.
Tax deductions decrease the amount of your taxable income. They are expenses that you have throughout the year, which can be subtracted from your gross income to know how much tax you should pay. Tax deductions come in a variety of ways, from work-related purposes to healthcare to education to investment-related purposes and to itemized deductions. For more information, visit Investopedia: Tax Deductions.
For official information regarding income tax brackets in the United States, visit the Internal Revenue Service’s website.
Written by Allie Chang