Figuring out your tax bracket is a necessary, yet surprisingly complicated, endeavor. This equation and calculation could be instrumental in finding additional ways to reduce your federal tax bill and to recheck any of the work that was already done by tax-software program or tax preparer.
It should be known that in 2019, the Tax Cuts and Jobs Act has already lowered tax rates. Also, amongst other factors, a loss of personal exemptions and an increase in the standard deduction can affect the formula used to decide the tax bracket into which a person’s income may fall.
There are seven general taxable brackets:
The filers’ annual income is used to decide the taxable bracket. A progressive tax system is employed by the federal government, meaning that higher tax rates are applied to people with higher incomes. Also, it is organized in such a manner so that taxpayers are paying higher rates on each dollar after a certain threshold is crossed, as opposed to everyone paying the same rate on every dollar earned.
Your tax bracket, and furthermore, your tax burden can be figured out by following these steps:
-Determine your filing status.
-Figure out the total of all of your income.
-Research the 2019 tax brackets.
-Learn about the effective rate vs. marginal rate.
-Understand all the other ways your tax rate may be lowered.
Additional information on how to use these steps in order to either increase your refund or reduce money owed can be found below.
Determine Your Filing Status
You should be aware of your tax-filing status before you can figure out what bracket your taxable income falls into. The most common statuses are:
-Married and filing jointly
-Married and filing separately
-Head of household
You will use different statuses depending on several different factors: if you’re married or single, having qualifying dependents, etc. and other specifics. Married couples are free to jointly file their taxes, but others often choose separate filing for many reasons, some of which include divorce proceedings, or separate student loan debt.
Adding Up Your Income
This is the trickiest step and can be somewhat daunting, but it helps in the long run.
To find your gross income, you must first add up all the earnings you accrued from things such as work, alimony, rental properties, various investments, and any other places you receive taxable income – and then you’re going to subtract from that any money that maybe be exempt via the current tax code. The number you end up with is what is known as your ‘gross income.’
As Christ Raulston, wealth strategist at Raymond James in Memphis, Tennesse puts it: “Gross income is pretty much everything, and it’s defined in the law as income from all sources unless there’s an exception in the tax code.”
Next, adjustments such as individual retirement account (IRA) contributions or student loan interest will need to be subtracted. This will yield your ‘adjusted gross income.’
You should subtract these tax deductions after the adjusted gross income has been determined. This is where you’ll opt to either itemize your deductions (which you can do by subtracting things such as mortgage interest, charitable contributions, and other below-the-line deductions) or you decide to go with the standard deduction (which is $12,000 for single filers; $24,000 for married filing jointly.)
The final step is to determine your tax bracket using the taxable income you have just figured out. Don’t forget that certain investments are taxed not at ordinary income levels, but using the capital gains rate. While you do this exercise, it is important that you remember that.
Learning About Effective Rate vs. Marginal Rate
Let’s say you earned $50,000 in 2018 in taxable income, and you’re a single-filer. That would mean the tax bracket you fall into would be the 22 percent, as per the table above. This is what is called a ‘marginal rate.’ But that doesn’t mean you must pay the federal government 22 percent of every taxable dollar.
Rather, any amount that exceeds $38,700 is what you’ll be paying tax on. Your tax rate will actually look more like this:
10% x $9,525 = $952.50
12% x $29,175 ($38,700 – $9,525) = $3,501
22% x $11,300 ($50,000 – $38,700) = $2,486
The ‘effective rate’ ( which is the amount of three of those) is $6939.50, which is nearly 14 percent, and that is your total tax liability.
Other Things to Consider when Attempting to Lowering Your Tax Rate
There are strategies that filers may want to use that can lower their tax bill by placing themselves in a lower tax bracket. If the taxable income falls on the cutoff line between brackets, this is especially true.
Experts say that the best time to examine moves such as delaying income or making contributions to personal trusts, like retirement funds or health savings accounts, is right before the end of the tax year. Even if it’s after January 1st, there are still some moves you can make to lower the burden. As Jaeger puts it: “Now that we’re in 2019, making those moves is starting to wind down. But you can still make that traditional IRA deduction until April 15.” However, be sure to make this retirement plan contribution before you file your taxes if you’re looking to lower your taxable income in 2019.
To narrow down any additional ways to lower your tax bracket, work with your financial professional or tax preparer. Deductions such as “bunching” may be suggested by a financial advisor in the 2019 tax season, which means you’d to qualify to make itemized deductions and, ultimately, lower your tax bill.
To sum it up: Understanding your tax rates is the first step to lowering your tax bracket, and reducing your bill.