Tax Brackets and Statuses
Your income taxes are determined by what you earn and other key factors.
You pay federal income tax at one or more tax rates, or percentages, based on how much money (that is taxable) you earn. That’s because the government slices income into segments called tax brackets. Your tax bracket, or the range of incomes that you fall into, will determine your tax rate. For example, single filers in tax year 2020 that make $0-$9,875 are in one bracket, $9,876-$40,125 are in the next, and so on.
If your total taxable income falls within the bracket taxed at the lowest rate, you pay at that one rate. But if you have taxable income that puts you into the next higher bracket, the income in the lowest bracket is taxed at one rate and the remainder at the next rate. If your taxable income puts you in the highest bracket, you pay tax at all the rates, with a different rate for each bracket.
Your marginal tax rate is the highest rate that you pay depending on the bracket you fall into.
People with the lowest taxable incomes have the lowest marginal rate and those with the highest have the highest marginal rate. Unless you pay only at the lowest rate, your effective tax rate, or the actual percentage of your total taxable income that you pay, is always less than your marginal rate because you are only paying the highest rate on a portion of your income.
Your filing status is the other factor that determines how much income tax you owe in any year. In fact, filing status is the major reason that people with similar incomes owe different amounts. When you’re supporting yourself—which means you get less than half of your support from someone else—you choose your filing status from among the five that are available, based on your actual living situation, or, more precisely, your situation as the IRS defines it.
- Married filing jointly
- Married filing separately
- Head of household
- Widow or widower with dependent child
While federal income taxes get the most attention, you may also be paying income taxes to the state where you live. There are only seven states that do not collect income tax—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two others—New Hampshire and Tennessee—tax some money, but not earned income. State and federal taxes together create your combined tax rate. Some cities also collect income tax.
Tax laws change all the time. Congress regularly tweaks the existing rules and occasionally does massive changes. Sometimes the changes add new tax benefits, such as the opportunity to contribute to Roth IRAs and Roth accounts in 401(k)s and similar plans, and sometimes benefits can be eliminated.
The alternative minimum tax (AMT) is another tax system that was created to make sure high-income taxpayers couldn’t avoid paying their fair share of taxes by taking advantage of loopholes. This alternative way of calculating taxes is done automatically by most tax software alongside regular rates. If there is a difference between the taxes you owe with the regular rate and the AMT, you must pay the higher amount.
There are some curiosities in the tax code that you may run up against from time to time. For example, if you live in the District of Columbia or a state that recognizes common-law marriage, or if you lived in one of those states when you began your relationship, you can file a federal joint return with your partner even though you’re not legally married.
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