Putting It All Together: Calculating Your Tax Bill
To calculate how much you owe in taxes, start with the lowest bracket. Multiply the rate by the maximum amount of income for that bracket. Repeat that step for the next bracket, and continue until you reach your bracket. Add the taxes from each bracket together to get your total tax bill.
For example, the single filer with $80,000 in taxable income would pay the lowest rate on the first $9,875 he makes; then 12% on anything earned from $9,786 to $40,125 ; then 22% on the rest, up to $80,000 for a total tax bill of $13,774.
Effectively, this filer is paying a tax rate of 17.2% , which is less that the 22% tax bracket our taxpayer actually is in.
But, wait. Effective tax rates dont factor in any deductions, so if you wanted get closer to what percentage of your salary goes to Uncle Sam, try using your adjusted gross income. Assuming the single filer with $80,000 in taxable income opted for the standard deduction , the amount of his AGI that went to the IRS was 14.9% a far cry from 22%.
For a final figure, take your gross income before adjustments. Add back in your allowable above the line deductions for example, retirement and health savings account contributions; certain business-related expenses; alimony paid and divide your tax bill by that number. The overall rate for our single filer with $80,000 in taxable income might be closer to 12% or even lower.
What About Tax Credits
You might also qualify for tax credits. While they dont reduce your taxable income or change your tax bracket, theyre even better they reduce your income tax liability. In other words, whatever amount of tax you are deemed to owe, you can deduct the entire amount of the tax credit on a dollar-for-dollar basis.
You may qualify for federal or state tax credits, and they vary by income, so be sure to talk with a tax professional. Common tax credits include:
- Child tax credit
- Residential energy tax credit
- Renters tax credit
While paying taxes is no ones idea of a good time, understanding federal tax brackets and other nuances of the tax system can at least make it a little less confusing and help you feel more comfortable and confident when it comes time to file.
Please remember that, while this article does provide some tax information, this is not tax advice. Please consult a financial advisor for tax assistance.
Penalty For Underpayment Of Estimated Tax
If you didnt pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers, ;fishermen, and certain higher income taxpayers. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.
However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210,;Underpayment of Estimated Tax by Individuals, Estates, and Trusts; , to see if you owe a penalty for underpaying your estimated tax. Please refer to the;Form 1040 and 1040-SR;Instructions;or Form 1120 Instructions , for where to report the estimated tax penalty on your return.
The penalty may also be waived if:
- The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
- You retired or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.
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Taxable Income Is What Matters
Tax brackets apply only to your taxable incomethat is, your total income minus all your adjustments and deductions.
For example, in 2020, let’s say a married couple files jointly with a combined total income of $80,400.; They take the 2020 standard deduction amount of $24,800 and each spouse takes a $5,500 IRA deduction.
- $5,500 + $5,500 + $24,800 = $35,800 deductions
- $80,800 total income – $35,800 deductions = $45,000 taxable income
These deductions could reduce their taxable income by $35,800 and help drop the family into a lower tax bracket.
What Is My Tax Bracket
The federal income tax system is progressive, which means that different tax rates apply to different portions of your taxable income. The term “tax bracket” refers to the highest tax rate applied to the top portion of your taxable income and depends on your filing status. Here’s how to calculate your tax bracket.
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Tax Rates And Tax Brackets
Depending on the amount of income you earn, you will fall within one of five;federal tax brackets, and one of the five Ontario tax brackets. Each tax bracket is taxed at a different rate. The system is based on what is called graduated tax rates. This means that if your income increases so that you enter a new tax bracket, only the amount of your income that falls in the higher tax bracket gets taxed at the higher rate. Tax brackets are set by both the federal government and by each province.
Upcoming Tax Brackets & Tax Rates For 2020
Note: This can get a bit confusing. The filing deadline for the 2020 tax year is April 15, 2021. Which means you account for your 2020 tax bill in 2021. Add the fact that the IRS released the ground rules for 2021 taxes in October 2020, and your head is swimming in a pool so perplexing that a state of confusion can be excused.
But wait. Come springtime, will Washington ponder another filing delay in response to a new or ongoing national emergency? You never know.
What we do know is the rates and brackets for the 2020 tax year are set.
Here is a look at what the brackets and tax rates are for 2020 :
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When To Change How Much Tax Is Withheld From Your Pension
When you are working, you can change the amount of tax withheld from your paycheck each year. In retirement, you can do that, too. When your tax situation changes, you will want to adjust your tax withholding.
For example, your first year of retirement you may have a salary for part of the year, and you may have a spouse who is still working, so you may need to withhold a larger amount in taxes from your pension for that year. In subsequent years, your income may change, which means you should adjust your tax withholding.
The following events may trigger a need to change your tax withholding in retirement:
- Your spouse stops working.
- You or a spouse take on part-time work.
- You pay off a mortgage or take on a mortgage.
- You have a large amount of taxable capital gains from the sale of a property, mutual funds, or stock.
- You take withdrawals from an IRA or 401 account.
- You and/or a spouse start Social Security benefits.
- You reach age 72 , and required IRA distributions begin
How This Federal Tax Calculator Works
To use this calculator, you’ll have to answer just a few simple questions. Enter your filing status and total gross income, along with any investment income you received or retirement contributions you made. Then, consider whether you’ll take itemized deductions or just take the standard deduction. Finally, enter how many dependents you’re entitled to claim, as well as the number of children you have. Once you do that, the calculator will give you an estimate of your tax bill.
For instance, take a married couple with $40,000 in gross income and one child. The couple doesn’t itemize deductions and contributes $1,000 to a traditional IRA.
When you run this scenario through the calculator, you can see how it works. The IRA contribution reduces adjusted gross income to $39,000, and the $12,600 standard deduction and $12,150 in personal exemptions for three family members takes taxable income down to $14,250. In the 10% bracket, that produces tentative tax of $1,425, and the $1,000 child tax credit takes the estimate down to $425.
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How To Calculate Federal Tax Credits
Unlike adjustments and deductions, which apply to your income, tax credits apply to your tax liability, which means the amount of tax that you owe.
For example, if you calculate that you have tax liability of $1,000 based on your taxable income and your tax bracket, and you are eligible for a tax credit of $200, that would reduce your liability to $800. In other words, you would only owe $800 to the federal government.
Tax credits are only awarded in certain circumstances, however. Some credits are refundable, which means you can receive payment for them even if you dont owe any income tax. By contrast, nonrefundable tax credits can reduce your liability no lower than zero. The list below describes the most common federal income tax credits.
- The Earned Income Tax Credit is a refundable credit for taxpayers with income below a certain level. The credit can be up to $6,660 per year for taxpayers with three or more children, or lower amounts for taxpayers with two, one or no children.
- The Child and Dependent Care Credit is a nonrefundable credit of up to $3,000 or $6,000 related to childcare expenses incurred while working or looking for work.
- The Adoption Credit is a nonrefundable credit equal to certain expenses related to the adoption of a child.
- The American Opportunity Tax Credit is a partially refundable credit of up to $2,500 per year for enrollment fees, tuition, course materials and other qualified expenses for your first four years of post-secondary education.
When Social Security Is Not Taxable
You won’t owe federal tax on your Social Security benefits if your total income falls below the taxable thresholds set by the IRS.
You won’t owe state taxes on your benefits if you live in any of the 37 states that don’t tax this income. You can minimize the tax burden by adopting one of the strategies below.
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How To Get Into A Lower Tax Bracket
Americans have two main ways to get into a lower tax bracket: tax credits and tax deductions.
Tax credits are a dollar-for-dollar reduction in your income tax bill. If you have a $2,000 tax bill but are eligible for $500 in tax credits, your bill drops to $1,500. Tax credits can save you more in taxes than deductions, and Americans can qualify for a variety of different credits.
The federal government gives tax credits for the cost of buying solar panels for your house and to offset the cost of adopting a child. Americans can also use education tax credits, tax credits for the cost of child care and dependent care and tax credits for having children, to name a few. Many states also offer tax credits.
While tax credits reduce your actual tax bill, tax deductions reduce the amount of your income that is taxable. If you have enough deductions to exceed the standard deduction for your filing status, you can itemize those expenses to lower your taxable income. For example, if your medical expenses exceed 10 percent of your adjusted gross income in 2021, you can claim those and lower your taxable income.
Previous Years Tax Brackets
Taxes were originally due April 15, but as with a lot of things, it changed in 2020. The tax deadline was extended to July 15 in order to let Americans get their finances together without the burden of a due date right around the corner.
Here is a look at what the brackets and tax rates were for 2019:2019 Tax Brackets
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Change In Withholding When You Start Social Security
Many retirees who have a pension are surprised by the increase in their taxes when they start Social Security. The amount of your Social Security benefits subject to taxation depends on your other sources of income. If your;pension started a few years ago, and now you are starting Social Security benefits, you will likely need to increase your tax withholding.
How Much In Taxes Should I Withhold From My Pension
Eric is a duly licensed Independent Insurance Broker licensed in Life, Health, Property, and Casualty insurance.;He has worked more than 13 years in both public and private accounting jobs and more than four years licensed as an insurance producer.;His background in tax accounting has served as a solid base supporting his current book of business.
When you start a pension, you can choose to have federal and state taxes withheld from your monthly checks. The goal is to withhold enough taxes that you won’t owe much money when you file your tax return. You don’t want to get a large refund,;either, unless you like lending money to Uncle Sam.
If you choose not to have any taxes withheld, and you underpay your taxes, you could end up owing taxes plus an underpayment penalty. To avoid those fates, you’ll want to estimate your income for the year and set your tax withholding appropriately.
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Extended Due Date Of First Estimated Tax Payment
Pursuant toNotice 2020-18, the due date for your first estimated tax payment was automatically postponed from April 15, 2020, to July 15, 2020. Likewise, pursuant to , the due date for your second estimated tax payment was automatically postponed from June 15, 2020, to July 15, 2020. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.
Figuring Out How Much Taxes You Owe
If you were a single filer who made $86,000;in taxable income after deductions in 2020, you would pay a total of $14,574 in taxes.
Wondering how we got there? Take a look at the chart above and follow along below:
With a;taxable income of $86,000, your income falls into the 24% tax bracket for federal taxes. But as we noted, that doesnt mean the whole $86,000 will be taxed at 24%. Just a portion of it will. The other portions will be taxed at 10%, 12% or 22%.
Heres a breakdown of how much each portion of your income will be taxed:
- $9,875 of your income will be taxed at 10%.
- $30,249 will be taxed at 12%.;This is the portion of your income that falls between $9,876 and $40,125. To get this number, subtract the $9,876 from $40,125.
- $45,399 will be taxed at 22%.;This is the portion of income that falls between $40,126 and $85,525. To get this number, subtract $40,126 from $85,525.
- $477 will be taxed at 24%.;This is the portion of income that falls between $85,526 and $163,300. Since your income does not surpass this bracket, you get this number by adding the previous portions together and subtracting them from your total income.
Now that you know what parts of your income get taxed in each bracket, you can see how much youll owe in taxes total.
To do that, carry the total from the previous tax bracket and add it to the percentage youre taxed in the next bracket, then carry that total over. Do this until you reach your tax bracket .
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Us Salary Comparison Calculator
The US salary comparison calculator is very popular with jobseekers and those looking to compare salaries in different jobs or different income tax calculations and deductions in different states. The salary comparison calculator allows you to compare up to 6 salaries side by side. You can select different states and different tax years to produce a range of different salary comparisons for different filer status . This tool uses standard setting to support standard comparison.
Use the US Salary Comparison Calculator
Reducing Tax Payable: Deductions And Credits
There are two main ways to reduce the amount of tax you pay: by claiming deductions and by claiming tax credits.
Deductions are amounts you can subtract directly from your income before calculating tax. There are not as many deductions for individuals earning;employment income,;in comparison to individuals who carry on a business. However, some common deductions for individuals include: support payments made to an ex-spouse, contribution amounts to an RRSP up-to your annual maximum, and moving expenses, if you had to move more than 40 kilometres because of work.
Tax credits work differently from deductions in that they;are subtracted from the amount of tax you owe, as opposed to your income before taxes. The most common credit that everyone can claim is a basic personal tax credit, which allows you to subtract an amount set by the government. The federal basic personal amount;for the 2020 tax year is;$13,229.;For 2021, this amount is $13,808.; There are also provincial basic personal tax credit amounts, set by each province. In Ontario, it is $10,783 for 2020. For the 2021 tax year, it is $10,880.
For more information, go to 1700;What are tax deductions, credits and benefits?
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