The IRS uses a progressive tax system to determine how much money each citizen owes at tax time. This system involves using a series of brackets that indicate at what percentage each level of income is taxed. A number of misconceptions exist about tax brackets and the reasons for why they are used today. You can clear up any confusion and prepare to file your taxes better by learning the basics of tax brackets.
Why are Tax Brackets Used?
As noted, these brackets are used to progressively tax people's incomes at various levels. The IRS uses seven different tax rates that are each applied to different levels of income.
The bracket that will apply to you as you file taxes will depend on not only on the amount of your taxable income but also your filing status. The brackets apply to the statuses for:
- single
- married filing jointly or qualifying widower
- married filing separately
- head of household
The IRS offers updated tax bracket information each year on its website IRS.gov. If you are unsure of what percentage in taxes you will pay this year or if you want to learn whether or not you should change your filing status to ease your tax burden, you should consult a tax professional before filing your return.
Why Should You Pay Attention to Tax Brackets?
Some tax filers do not care a lot about the bracket in which their incomes fall. They falsely believe that they can do little to change how much they will pay in taxes. They simply file their returns and let the proverbial chips fall where they may.
In fact, you should learn at what percentage your income will be taxed because there are a few tips that you can use to lower how much you might owe to the IRS. Once you know in what bracket your taxable income will lie for the next tax year, you can divert some of your money so that you are taxed at a lower rate.
For example, one of the best ways to ease your tax burden involves putting money into a retirement account like a Roth IRA or 401k. Your retirement contributions are tax exempt and can help lower the amount of your taxable income.
Likewise, you can donate money or goods to charity. Charitable contributions are a great way to balance out what you owe the IRS and can significantly lower your tax burden. Make sure that you make these contributions before the end of the year and also save receipts. Also make sure that you are donating to an approved 501c non-profit charity.
Finally, one of the most common ways that people lower what they owe the IRS regardless of their tax bracket involves claiming dependents. If you care for a child under the age of 18 for at least six months out of the year or if you care for an elderly parent or disabled family member, you may be able to claim that person as a dependent on your tax return.
Tax brackets allow the IRS to determine how much you and other taxpayers will owe to the government. These brackets are based on your filing status and taxable income. By knowing in what bracket your own income falls, you can take steps to lower the amount that you will owe to the IRS. Donating to charity or saving for retirement can help ease your tax burden.
