Tax Brackets and Statuses
How much you owe in federal income taxes is determined by many factors, but your tax bracket and status will likely have the biggest impact.
You pay federal income tax at one or more tax rates, or percentages, based on the tax bracket(s) you fall into. A tax bracket is a range of income decided by the government. For example, for single filers for tax year 2020, $0-$9,875 is one bracket, $9,876-40,125 is another, and so on.
The U.S. uses a progressive tax system. That means that taxable income is not all taxed at the same rate unless all of it falls into the lowest bracket. If you have taxable income that puts you into a higher bracket, the section of income that falls into each one is taxed at that rate.
Let’s look at an example. If you were a single filer for 2020 and your taxable income was $50,000, you would fall into the first three brackets. That means $9,875 would be taxed at 10%, $30,249 (the amount of money that falls between $9,876 and $40,125) would be taxed at 12%, and $9,874 (the amount of money between $40,126 and your total $50,000) would be taxed at 22%.
Your marginal tax rate is the highest rate that you pay depending on the bracket you fall into. For the example above, your marginal tax rate would be 22%. People with the lowest taxable incomes have the lowest marginal rate and those with the highest have the highest marginal rate.
On the other hand, your effective tax rate is the actual percentage of your total taxable income that you pay. For the above example, you would pay a total of $6,789.66 in taxes on $50,000, meaning your effective tax rate would be 13.5%. Unless you pay only at the lowest rate, your effective tax rate is always less than your marginal rate.
Filing statuses are the major reason that people with similar incomes owe different amounts because it affects which tax bracket you fall into. When you’re supporting yourself—which means you get less than half of your support from someone else—you choose your filing status from among the five options that are available, based on your actual living situation, or, more precisely, your situation as the IRS defines it. The options are:
- Married filing jointly
- Married filing separately
- Head of household
- Widow or widower with dependent child
The Alternative Minimum Tax (AMT) is another tax system that was created to make sure high-income taxpayers couldn’t avoid paying their fair share of taxes by taking advantage of loopholes. This alternative way of calculating taxes is done automatically by most tax software alongside regular rates using tax brackets. If there's a difference between the taxes you owe with the regular rate and the AMT, you must pay the higher amount.
There are some curiosities in the tax code that you may run up against from time to time. For example, if you live in the District of Columbia or a state that recognizes common-law marriage, or if you lived in one of those states when you began your relationship, you can choose to file under the status “married filing jointly” for your federal return, even though you’re not legally married. It may be wise to check for any such unusual situations that you may fall into.
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