Many people are somewhat familiar with the concept of a tax bracket, but do not have a complete grasp on the details of the subject. Fortunately, speaking with a tax preparer in Jamestown, ND can help clear up some of the confusion.
Basically, the United States has a progressive tax system, which means different parts of your income get taxed at different rates based on a variety of factors. In general, you will pay a higher overall rate if you have a higher amount of taxable income.
The brackets themselves are an easy means of conveying this system to people who need to know exactly how much they are responsible for paying in taxes. Tax brackets and rates are subject to regular changes, so it is important to stay up to date with the latest information as you prepare to file every year.
The details of income tax brackets
As stated, the tax brackets affect you in different ways depending on how much money you make and what your marital status is. For example, if you are single, you will have the lowest tax rate (10 percent) applied to the first $8,700 you make, with the next chunk subject to a 15 percent tax. These rate hikes continue to increase until you have reached the top amount of your taxable income.
Your effective tax rate is a term used to refer to the percentage of your income that is actually sent directly to the IRS. The rate you paid for the last amount of money you earned tends to be higher than your effective tax rate. Say, for example, you had half your income taxed at 10 percent and the rest taxed at 15 percent—in this case, your effective tax rate would be 12.5 percent, the average of these rates. In a practical application, this would mean you are paying 12.5 cents out of every dollar you made directly to the IRS.
Factors with an effect on tax brackets
There are some factors that play into how much you are taxed and what bracket you fall into for a specific percentage of your income. For example, married people stay in the lower tax bracket for a greater amount of their income than single people. Certain deductions can decrease the amount of your taxable income, which in turn means less of your income is subject to rates in higher tax brackets. Depending on how much you are able to deduct, you could entirely avoid a higher tax bracket altogether.
Again, tax brackets and rates are constantly changing. Before you begin your paperwork to file your taxes, you should check to make sure you have all of the most accurate, up-to-date information so you know exactly what sort of financial impact your taxes will have on you and what sort of return you can expect.
Want more in-depth explanation of tax brackets? Reach out to a tax preparer in Jamestown, ND for further assistance. Contact Craig S. Hanson, CPA today to get all of your tax-related questions answered by a skilled expert.