Understanding Federal Income Tax Brackets
Men and women often turn to a tax professional to have their yearly income tax forms completed. With so many forms to fill out, calculations to make, and numbers to insert, it’s no wonder people become stressed during the first months of the year. Thanks to the recent tax cuts enacted by the Trump administration, the entire process of completing your taxes has become more confusing.
While the idea of keeping more money in your wallet is always good, learning the new laws can be challenging. The biggest change taxpayers need to be aware of is the new tax brackets. Currently, there are seven brackets a person may fall into when it comes to their income tax-10%, 12%, 22%, 24%, 32%, 35%, and 37%.
However, these are marginal tax rates, which means a person’s income will be taxed at different levels. This leaves many people wondering how much they are expected to pay. This depends not only on the taxpayer’s filing status but also their taxable income.
Taxable Income Brackets
When the IRS looks at a person’s pay to determine how much tax is owed, they divide the taxable income into portions to make the tax progressive. Each bracket is charged at a higher rate, thus a person who makes very little in a year will pay a much smaller tax than a person who is making hundreds of thousands of dollars.
However, the person with the larger income pays the same rate as the lower-income taxpayers on a certain portion of their income. As the income goes up, the higher tax brackets come into play. The tax assessed also depends on whether the person is single, married, or filing as head of household.
What a person needs to do is determine how much they make and will be taxed on. Once this has been determined, they next need to decide which filing status they will be using. Both pieces of information are required to determine the tax to be paid. Be aware that this process only applies to federal taxes, as each state establishes its state income tax system.
Tax Brackets for Single Filers in 2019
A ten percent tax will be assessed on any taxable income up to $9,700. When the filer makes more than this, the amount between $9,701 and $39,475 is assessed at a 12 percent tax rate. All income between $39,476 and $84,200 is assessed at a 22 percent tax rate, and income between $84,201 and $160,725 is subject to 24 percent tax. Those individuals making more than $160,725 a year will find any income between $160,726 and $204,100 is assessed at the 32 percent tax rate, and income between $204,101 and $510,300 is subject to a 35 percent tax rate. All income over $510,301 is assessed at the 37 percent tax rate.
Regardless of how much the filer makes, the first $9,525 is assessed at the ten percent rate. Any income above that is assessed at the tax rate for the category in which it falls. Therefore, a person who makes $250,000 a year will have their income tax assessed at six different tax rates, which is why this is called a progressive tax system.
When this type of system is used, all taxpayers are treated the same up to their income level. It’s only when a person makes more that they are subjected to higher tax rates. What about couples filing a joint return?
Tax Brackets for Married Filing Separately
The IRS treated married couples filing separately as individual taxpayers for the most part. However, there is one notable exception. When a married person filing separately reaches the income threshold of $204,401, the taxable income bracket changes. An individual in this situation is taxed at the 35 percent tax rate on any income between $204,101 and $306,175. When they reach $306,176 in taxable income, the filer is subject to the 37 percent tax rate.
Tax Brackets for Married Filing Jointly
Couples filing a joint tax return combine their income, and the IRS allows for higher taxable income brackets to account for this. The ten percent tax rate is assessed on any taxable income up to $19,400 for these filers. Income between $19,401 and $78,950 is assessed at the 12 percent rate, and income between $78,951 and $168,400 is subject to a 22 percent tax rate. The 24 percent tax rate applies to any income between $168,401 and $321,450, and income that falls into the $321,451 to $408,200 taxable income bracket is taxed at a rate of 32 percent. Income between $408,201 and $612,350 is subject to a 35 percent tax, while all funds earned over $612,351 will be taxed at 37 percent. Again, this is a progressive tax, so some funds will be taxed at the ten percent rate and others at higher rates.
Head of Household Tax Brackets
What about those individuals filing as head of household? How are they treated under the new tax laws? These taxpayers can generate more income before moving into a higher taxable income bracket. Income up to $13,850 is taxed at the ten percent rate, while the 12 percent tax rate applies to income between $13,851 and $52,850. Individuals who make between $52,851 and $84,200 are taxed on these funds at the 22 percent tax rate, and income between $84,201 and $160,700 is taxed at 24 percent. Earn $160,701 to $204,100 and be taxed at 32 percent for the income falling into this category, while those making between $$204,101 and $510,300 are subject to 35 percent tax. Any income over $501,301 is taxed at 37 percent. As with the other tax filing categories, head of household income tax brackets are progressive.
Reducing the Tax Burden
Fortunately, there are ways a person can reduce their tax burden. The first option is to make use of the standard deduction. However, some people find they can lower their income tax burden by itemizing.
The standard deduction has increased for 2019. Individuals and couples who are married filing separately can file a standard deduction of $12,200. For married couples, the deduction increases to $24,400, and a person filing as head of household will be able to claim a deduction of $18,350.
Itemizing benefits some, however. Items that may be deducted using this method include state and local taxes, home mortgage interest, and charitable contributions. Nevertheless, there are limits on how much can be deducted using this method, and many people find they need the assistance of a tax professional to ensure they take only what is permitted.
Tax credits, such as the child tax credit, may also help to reduce the amount a person owes to the federal government. These credits reduce the amount of money the taxpayer owes. They are extremely helpful as the taxpayer deducts the entire amount of the credit from the amount owed to the federal government.
Tax laws are complex and confuse many Americans. However, by learning about changes to these laws, a person can ensure they aren’t paying more than they must. Fortunately, when a person learns they owe taxes, a personal loan can be of help. This is always a better option in the eyes of many than being in debt to the IRS.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.