Tax Brackets & The Tax Cuts And Jobs Act Of 2017
The Tax Cuts and Jobs Act of 2017 guides current tax policy. Among its notable achievements:
- Number of brackets remained steady at seven.
- Four of the lowest five marginal rates dropped between one and four points; the top rate sank 2.6 points, to 37%.
- Modified bracket widths.
- Eliminated the personal exemption, but nearly doubled the standard deduction.
- Indexed brackets and other provisions to the Chained Consumer Price Index measure of inflation .
- Retains the charitable contribution deduction.
- Caps the mortgage interest deduction to the first $750,000 in principal value.
- Deduction for state and local income, sales, and property taxes limited to a combined $10,000.
While taxpayers still may use itemizing if their total deductions work to their advantage , boosting the standard deduction was designed to simplify calculations for the vast majority of filers and it worked. For the 2018 tax year, 90% of households opted for the standard deduction, up from 70% in recent previous years .
What Is An Effective Tax Rate
Your effective tax rate is the average of all the tax brackets the IRS uses for income tiers. To understand your effective rate, you first have to know the IRS tax brackets.
The IRS assesses a 10% rate for single filers with income up to $9,875 in the 2020 tax year. After that, youll face the following marginal tax rates based on your income:;
- 12% for incomes of $9,876$40,125
- 22% for incomes of $40,126$85,525
- 24% for incomes of $85,526$163,300
- 32% for incomes of $163,301$207,350
- 35% for incomes of $207,351$518,400
- 37% for incomes above $518,400
If you are married filing jointly, your marginal tax rates are:;
- 12% for incomes of $19,751$80,250
- 22% for incomes of $80,251$171,050
- 24% for incomes of $171,051$326,600
- 32% for incomes of $$326,601$414,700
- 35% for incomes of $414,701$622,050
- 37% for incomes above $622,050
Youd be in the 22% tax bracket if you earn $60,000 in 2020 and youre single, but you wont pay 22% of your total income in taxes. Youd pay 22% on just your top dollarsthe portion over $40,125 as of the 2020 tax year.;
;The chart below shows the effective tax rate by income for single individuals for the 2020 tax year, the tax return youll file in 2021.
Calculating Effective Tax Rate
The effective tax rate is the overall tax rate paid by the company on its earned income. The most straightforward way to calculate effective tax rate is to divide the income tax expense by the earnings before taxes. Tax expense is usually the last line item before the bottom linenet incomeon an income statement.
For example, if a company earned $100,000 before taxes and paid $25,000 in taxes, then the effective tax rate is equal to 25,000 ÷ 100,000, or 0.25. In this case, you can clearly see that the company paid an overall rate of 25% in taxes on income.
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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.
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What Are Tax Brackets
Tax brackets were created by the IRS to determine how much money you need to pay the IRS annually.
The amount you pay in taxes depends on your income. If your taxable income increases, the taxes you pay will increase.
But figuring out your tax obligation isnt as easy as comparing your salary to the brackets shown above.
The tax system in the U.S. is progressive, which means your income is taxed at different levels. For example, if your taxable income is $50,000 for 2020, not all of it is taxed at 22%; some of it will be taxed in lower brackets.
You can calculate the tax bracket that you fall into by dividing your income that will be taxed into groups the tax brackets. Each group has its own tax rate. The bracket you are in also depends on your filing status: if youre a single filer, married filing jointly, married filing separately or head of household.
The tax bracket your top dollar falls into is your marginal tax bracket. This tax bracket is the highest tax ratewhich applies to the top portion of your income.
For example, if you are single and your taxable income is $75,000 in 2020, your marginal tax bracket is 22%.; Since your entire taxable income is not taxed at 22%, some of your income will be taxed at the lower tax brackets, 10% and 12%. As your income moves up the ladder, your taxes will increase. Take a look at this example for someone who has $75,000 in 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:
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Ways To Get Into A Lower Tax Bracket
You can lower your income into another tax bracket by using tax deductions such as charitable donations or; deducting property taxes and the mortgage interest paid on a home loan and property taxes. Deductions can lower how much of your income is ultimately taxed.
The Progressive Tax System
A progressive tax system is set up in increments. Your overall income is divided into segments, and you pay a different percentage in taxes on each of those segments. The more you earn, the higher the percentage rate becomes.
For example, you’ll pay 10 percent on the first $9,875 you earn if you’re single in 2020. You’ll pay 12 percent from there up to earnings of $40,125, and then 22 percent on income up to $85,525. You’re not paying 22 percent on all your income, even though this is commonly said to be your “tax bracket” because it represents your highest rate.
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How To Stay In A Lower Tax Bracket
You can reduce your tax bill with tax deductions and tax credits. Another way to reduce your taxable income, and thus stay in a lower tax bracket, is with pre-tax deductions.
A pre-tax deduction is money your employer deducts from your wages before withholding money for income and payroll taxes. Some common deductions are:
- Contributions to a 401 plan
- Contributions to a Flexible Spending Account
Returning to the example above, lets say you decide to participate in your employers 401 plan and contribute $1,500 per year to your account. Now, your taxable income is $39,000 contribution + $1,700 in other income $12,500 standard deduction). You remain in the 12% tax bracket while saving for retirement. Its a win-win.
For 2020, you can contribute up to $19,500 to a 401 plan. If youre age 50 or above, you can contribute an additional $6,500 in catch-up contributions, for a total of $26,000.;In 2021, the contribution limit will remain at $19,500, or $26,000 if youre age 50 or older.
If youre self-employed or dont have access to a 401 plan at work, you can still reduce your taxable income while saving for retirement by contributing to a Traditional IRA or through a broker or robo-advisor like SoFi Invest. These contributions reduce your AGI because they are above-the-line deductions .
For 2020, you can contribute up to $6,000 to a Traditional IRA . The contribution limits are the same for 2021.
Where To Find Property Taxes
Thankfully, in many cases, you may not have to calculate your own property taxes. You can often find the exact amount youll pay on listings at;realtor.com®, or else you can enter a homes location and price into an online;home affordability calculator, which will not only estimate your yearly taxes but also how much you can anticipate paying for your mortgage, home insurance, and other expenses.
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How To Calculate Fica Payroll Tax
Social Security withholding
To calculate Social Security withholding, multiply your employeeâs gross pay for the current pay period by the current Social Security tax rate .
This is the amount you will deduct from your employeeâs paycheck and remit along with your payroll taxes.
Example Social Security withholding calculation:
$5,000 x .062 = $310
To calculate Medicare withholding, multiply your employeeâs gross pay by the current Medicare tax rate .
Example Medicare withholding calculation:
$5,000 x .0145 = $72.50 (Medicare tax to be deducted from employeeâs paycheck
As an employer, you are responsible for matching what your employees pay in FICA taxes. So in this case, you would also remit $310 for Social Security tax and $72.50 for Medicare tax.
Include All Of Your Side Income
If youâre like many Americans, you may have had to pick up some side work during the course of the coronavirus pandemic, as many businesses had to close at least temporarily. While your side gig may not be your primary job, the IRS still views it as taxable income. Be sure to report all of the income you generated over the year from any source, even if it is a small amount or you do not receive any 1099s from people or businesses that paid you.
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How The Effective Tax Rate Works
To calculate your effective tax rate, you divide your income by the taxes you paid. What makes effective tax tricky is that two people in the same tax bracket could have different effective tax rates.;
Heres an example. Someone who earns $80,000 would pay the 22% rate on $39,875 of their income over $40,125 in 2020, whereas you would only have to pay a 22% rate on $19,875 of your income at $60,000 in taxable earnings. Yet you would both have the same marginal tax rate of 22% and fall into the same tax bracket.
You would owe $8,991 in taxes on $60,000 in income:
- $988 on the first $9,875 at 10%
- $3,630 on $9,876 up to $40,125 at 12%
- $4,373 on $40,126 up to $60,000 at 22%
The taxpayer who earned $80,000 in taxable income would owe $13,390 in tax:
- $988 on the first $9,875 at 10%
- $3,630 on $9,876 up to $40,125 at 12%
- $8,772 on $40,126 up to $80,000
The first persons effective tax rate would be 14.99%, while the second persons rate would be 16.74%. The second person has a higher effective tax rate because they made $20,000 more than the first person and therefore paid more taxes.
Your effective tax rate doesnt include taxes you might pay to your state, nor does it factor in property taxes or sales taxes. Its only what you owe the federal government in the way of income tax.
Knowing your effective tax rate can help with tax and budget planning, particularly if youre considering a significant change in life, such as getting married or retiring.
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What Is A Homes Fair Market Value
The market value of a home is basically the amount a knowledgeable buyer would pay a knowledgeable seller for a property, assuming an arms-length transaction and no pressure on either party to buy or sell. When a property sells to an unrelated party, the sales price is generally assumed to be the fair value of the property.
Don’t Forget Your Ira Contributions
If you make a contribution to a traditional IRA, you might be entitled to a tax deduction. Although youâre supposed to receive a tax document from your IRA provider reflecting your contribution, this may be easy to overlook at tax time. In some cases, that document may only be sent to you electronically, so if you donât keep close tabs on your email account and/or your online investment account, you may not even notice it. However, itâs important to get credit for this deduction if youâre entitled to it.
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Choose Your Software Provider
Even if you think youâre going to end up filing a paper tax return, it pays to use a reliable tax software provider to get through your return. Most of these software programs ask appropriate questions to ensure that youâre both reporting all of your income and taking advantage of all of the deductions that you can. Tax software programs also ensure that your math is correct and that your information gets reported on the appropriate forms, something that can be difficult to figure out if youâre filling for the first time.
Get Your Taxes Done Right
If the idea of doing all this tax math has you running for the hills, we get it. It can be a lot to figure out. The great news is that you dont have to crunch the numbers all by yourself. A tax;Endorsed Local Provider ;can walk you through the process from beginning to end so you can conquer your taxes with confidence! And thats definitely something youll feel like sharing at your next dinner party.
Maybe your taxes are simple enough to handle on your own. Great! Say hello to Ramsey;SmartTaxthe tax software designed with you in mind! With Ramsey SmartTax, youll;always;know right up front how much you owe when you e-file your taxes. No hidden fees, no gimmicks, no games.
About the author
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
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How To Calculate Taxable Income
Arriving at your taxable income requires a bit of arithmetic. Begin with your gross income, which is all the money you earned during the tax year: income from jobs, from owning a business, retirement withdrawals, Social Security), rents, and/or investment earnings.
Next up: determining your adjusted gross income . These are adjustments taken before any deductions are applied. These may include student loan interest, moving expenses, alimony you paid, tuition and fees, as well as contributions to a traditional IRA, among others. Subtract these expenses from your gross income to arrive at your AGI.
Finally, apply deductions.
Again, you may itemize your deductions by listing eligible expenses, or you may take the standard deduction. Everyone qualifies for the standard deduction, but if you think your allowable deductions exceed the standard deduction youre paying a lot in home mortgage interest; your property or state income taxes are high; medical expenses take a big bite out of your budget it would be make sense to take the time to itemize your deductions and see if it exceeds the allowable standard deduction.
The standard deduction for the 2020 tax year, due May 17, 2021
- Single filers: $12,400
- Heads of households: $18,650
Once of all that is calculated and subtracted from your AGI, youve arrived at your taxable income. But calculating how much you will pay in taxes isnt as simple as taking that number and multiplying it by your tax rate.