Understanding Tax Brackets
If you’re like most taxpayers, you probably dread tax season. But did you know having a better understanding of how tax brackets work can help you legally reduce how much you owe? This quick guide will explain the basics of tax brackets and give you tips to use them to your advantage.
What Are Tax Brackets?
The United States federal income tax system uses a marginal tax bracket system. This means different portions of your income are taxed at different rates, based on set income thresholds. The income brackets and their tax rates are:
- 10% – $0 to $10,275
- 12% – $10,276 to $41,775
- 22% – $41,776 to $89,075
- 24% – $89,076 to $170,050
- 32% – $170,051 to $215,950
- 35% – $215,951 to $539,900
- 37% – $539,901 or more
As you earn more, each additional dollar moves into a higher bracket, and you pay a higher rate on only that portion, not your entire income.
How Tax Brackets Affect You
Tax brackets determine what percentage of tax you owe on your last dollar of income. Knowing your tax bracket can help you calculate what deductions you can take and estimate what you will owe or be refunded.
For example, if you are solidly in the 22% bracket, each additional $100 of income costs you $22 extra in taxes. If you can reduce your taxable income by $100, you save $22.
Strategies Using Tax Bracket
Here Are Some Strategies To Employ Using Your Knowledge Of Tax Brackets:
- Contribute to retirement accounts – Reduces your taxable income now.
- Harvest investment losses – Offsets capital gains to lower your tax bill.
- Itemize deductions like mortgage interest – Reduces taxable income if more than standard deduction.
- Claim credits for expenses like education – Directly reduces taxes owed.
- Defer income to future years – Pushes you to lower bracket temporarily.
The savviest taxpayers understand how to take advantage of tax brackets to maximize deductions and income adjustments.
Use Tax Brackets To Your Advantage
Knowing your tax bracket can transform how you approach tax planning. With the right strategies, you can legally keep more of your hard-earned money. Talk to a tax professional to assess how you can put tax brackets to work for you.