They might not be everyone’s favorite topic, but let’s face it, paying taxes is a major part of being an American citizen. But even though tax season comes and goes each year, taxes seem to cause a lot of confusion in the public eye.
- How do taxes work?
- What income am I taxed on?
- How can I reduce the amount of taxes I owe?
- What can I do to make sure I’m complying with federal and state taxes?
These are all questions that come to mind when you’re filing taxes for the first time, and even when you’re filing for the tenth time, thanks to complexities and changes in tax laws. While these are all critical questions, probably the most important one to consider when budgeting and evaluating how taxes will impact your financial standing is, “which tax bracket am I in?”. In the United States, federal taxes are based on a structured tax bracket system which determines how much money taxpayers owe to the federal government based on their income.
The tax bracket you’re categorized within can impact your paychecks, budget, and overall financial plan, so it’s essential to keep this in mind as you prepare for tax season and your financial future. Continue reading our tax bracket guide to find out which tax bracket you’re in, how tax brackets work, and what you can do to reduce your tax liability.
For quick answers, click the links below to navigate throughout the article.
- How do Tax Brackets Work?
- Which Tax Bracket am I in?
- How to Determine Your Tax Bracket: Key Takeaways
How do Tax Brackets Work?
Before we can answer the question, “which tax bracket am I in?”, we should start by establishing some foundational knowledge about how tax brackets work and how taxes are structured in the United States.
Investopedia defines tax brackets as “a range of incomes subject to a certain income tax rate.”
All income taxes imposed on a federal level in the U.S. are structured within this tiered system of tax brackets, which are controlled by the Internal Revenue Service, also known as the IRS.
The tax bracket system essentially works like this: the higher your income, the higher you’ll be taxed. This is known as a progressive tax system. Depending on which tax deductions and credits you qualify for, you might find that you’re taxed at a lower rate than the tax bracket where your income falls.
If you’ve filed taxes before, you probably remembered having to file two different tax returns—one for federal taxes and one for state taxes. That’s because state and federal taxes are two separate entities. As you know, federal taxes are controlled and collected by the IRS, but state taxes are run by each state’s own governing system. This means that state governments can structure their income taxes as they choose. Therefore, they have the ability to impose a flat tax rate where state taxpayers all pay the same rate, a progressive tax system like the federal government, or no income taxes at all.
For the purpose of this article, we’ll be focusing on how federal taxes are structured to determine which tax bracket you’re in.
How is my income calculated for taxes?
As you know now, your federal tax bracket is determined by your income—but how much of your income can actually be taxed? In the United States, you’re taxed on what’s called your taxable income. Your taxable income is simply another way to say adjusted gross income or AGI. Let’s break that down a bit.
Adjusted gross income (or taxable income) is the amount of income you earned in a given tax year, before any itemized or standard deductions are factored into your annual income.
Where can you find your adjusted gross income? To find your AGI, refer to these forms:
- Line 37 on Form 1040
- Line 21 on Form 1040A
- Line 4 on Form 1040EZ
- Line 36 on Form 1040NR
Which Tax Bracket am I in?
There are currently seven different tax brackets within federal tax code. The lowest bracket imposes a rate of 10% on income less than $9,700; while the highest rate is 37%, which is taxed on income that’s between $510,300 and $612,350.
To find out which tax bracket you’re in, you’ll need to start by calculating your taxable income (your AGI). As we mentioned, your taxable income can be found on line 37 of Form 1040 or using any of the schedules cited above.
Once you have your taxable income, refer to the new tax bracket income levels for 2019:
How often do tax brackets change?Note: You might see income tax bracket changes year-over-year so be sure to check the IRS website before doing your taxes.
The IRS changes tax brackets each year to accommodate for shifts in the economy, like inflation, that may impact the cost of living.
How does my tax bracket impact my take-home pay?
If you’re classified as an employee (not an independent contractor), your employee is required to deduct a certain amount of your paychecks to account for federal income taxes each time you’re paid. The IRS says the amount your employer withholds from your paycheck depends on your earnings and how many allowances you claimed on your W-4 at the beginning of your employment.
How do taxes impact your take-home pay? The more allowances you claim on your W-4 Form, the less money withheld from your paychecks, and vice versa. If you claim the minimum amount of allowances, you’ll have more money taken out of your paychecks each pay period, but you’re more likely to receive a tax refund at the end of the tax season. Keep in mind, tax withholdings do not impact how much money you’re being taxed, but rather when that money is remitted to the IRS.
Pro Tip: The money that’s leftover on your paycheck is known as your net income. Read our other post to learn about gross income vs. net income.
If you’re a freelancer, you’ll be responsible for self-employment taxes since an employer will not be withholding federal taxes from your paychecks. To make sure you can afford them, you’ll want to be extra careful as you budget for taxes throughout the year.
Can I reduce the amount of federal taxes I pay?
Now that you know which tax bracket you’re in, you might be wondering if there’s a way to reduce the amount you owe to Uncle Sam. Good news! There are a number of tax deductions that you may qualify for which could help to lower your tax burden. These tax initiatives are designed to reduce your taxable income, and they’re often related to government-supported programs like the push for more sustainable energy or donations to charitable organizations. These deductions are known as itemized deductions.
Itemized deductions range in value and can be subtracted from your taxable income if you’re eligible to claim the deductions available.
In addition to itemized deductions, the federal government also offers what’s called a standard deduction. The standard deduction is a predetermined tax deduction that’s based on a taxpayer’s filing status.
Here are the standard deduction rates for 2019:
- Single: $12,200
- Married Filing Jointly: $24,400
- Head of Household: $18,350
Like itemized deductions, you can calculate the standard deduction by simply subtracting the deduction amount you qualify for from your taxable income (AGI).
What happens if I don’t pay the taxes I’m supposed to?
Not paying the appropriate taxes determined by your tax bracket could result in penalty fees from the IRS, tax debt, or even collections measures if you’re unable to pay your debts within the IRS’ timeframe.
How to Determine Your Tax Bracket: Key Takeaways
Now that you have a good understanding of tax brackets and how the federal tax system works, let’s circle back to a few key points.
- How are tax brackets structured?
There are seven tax brackets within the federal tax system. Each tax bracket represents the percent at which a taxpayer’s income will be taxed. These tax brackets correspond with a range of incomes—the higher your income, the more substantial your tax rate.
- Which tax bracket am I in?
Your tax bracket depends on your taxable income, which is also known as your AGI. Please refer to the table above.
- Can I reduce my tax liability?
Yes, U.S. taxpayers can either claim the standard deduction or itemize eligible deductions to reduce their tax burden. Additionally, if eligible, taxpayers can also claim certain tax credits that help to lower their tax bill dollar-for-dollar.
Taxes might not be the thing you’re building your entire personal budget around, but it’s important to understand how they work so that you can plan for your annual tax bill and remain in compliance with the standards upheld by the IRS.