Tax Brackets Explained

Buchalter & Pelphrey Attorneys At Law

We all pay taxes, but what are tax brackets, and why are they important? Keep reading for everything you need to know about federal taxes, the progressive income tax system, and the IRS.

Progressive Income Tax

Tax brackets are a fundamental part of the progressive income tax system. In simple terms, this system works by increasing taxes according to income. So, if you make $45,000 this year, but your income increases to $75,000 next year, your taxes increase to reflect your income.

This system ensures that high-income taxpayers contribute the most to the system while low-income taxpayers pay less because they can't afford higher tax rates. There are seven tax brackets in the U.S. tax code.

The brackets for 2021 are as follows:

  • 10% on income up to $9,875
  • 12% on income between $9,875 and $40,125
  • 22% on income between $40,126 and $85,525
  • 24% on income between $85,525 and $163,301
  • 32% on income between $163,301 and $207,350
  • 35% on income between $207,350 and $518,400
  • 37% on remaining income above $518,400

Essentially, these numbers represent the percentage of income tax you pay in each bracket. These rates can be adjusted by legislation and/or median household income changes but they generally stay close to the same amount regardless of outside influences. The Tax Cuts and Jobs Act lowered the taxable income range for each bracket which means many taxpayers will fall into a lower bracket for their 2020 tax returns. So, if you are in a lower bracket, you only pay 10% in taxes per year.

Marginal Tax Rate

Brackets are often confused with marginal tax rates, but they are slightly different. Tax brackets are based on minimum yearly income, while marginal tax rates apply to additional dollar amounts of income.

Your marginal tax rate would 22% of whatever income is left over after income tax is taken out. Marginal tax rates do not have fixed percentage of taxes to pay on your income. Instead, a portion of your income falls into a specific tax bracket. For example, if you earn $70,000, you are in the 22% bracket, but you'll only be taxed up to a certain threshold amount.

How To Find Your Tax Bracket

The first step when finding your tax bracket is calculating your taxable income. Generally speaking, taxable income = adjusted gross income (AGI) – standard itemized deductions. Most employers calculate your taxable income for you, and you can find it on your employment contract or get it from human resources.

Another factor when calculating your taxable income is filing status. Filing status is your family situation at the time of filing.

You may be:

  • Single
  • Head of household
  • Married filing jointly
  • Qualifying widow(er)
  • Married filing separately

Filing status determines how much your threshold taxable income is, eligibility for credits, and filing requirements. Married people filing jointly have a higher combined income than a single person, which means they fall into a higher bracket and may need to pay a higher percentage of taxes.

Now, let's put what we know about brackets and marginal income together with filing status. If you have a taxable income of $24,750, you may pay 10% income tax up to $19,900, with the remaining $5,000 taxed at 12%.

When determining which bracket you fall into, it's best to entrust your case to a professional. Whether you consult a tax specialist or an attorney, be sure that your taxes are in line with IRS regulations.

The Internal Revenue Service

The Internal Revenue Service or IRS is responsible for collecting and auditing taxes for every American. It also provides resources for taxation and filing that may come in handy during tax season. The interactive tax assistant is a tool you can use to find your filing status, taxable income, and marginal tax rate all in one place.

In addition to monitoring and assessing taxes, the IRS handles tax fraud cases. The tax system is confusing at best, and it seems easy to take advantage of a loophole here and a technicality there. However, tax fraud is a serious crime, and the IRS punishes people with impunity.

On the other hand, as easy as it is to take advantage of the system, it's even easier to make a mistake that might get you into trouble. Tax audits are no joke, and you may face serious penalties if the IRS thinks you committed fraud.

If you have been accused of tax fraud, contact Buchalter & Pelphrey Attorneys At Law as soon as possible.

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