How Income Tax Brackets Work
Ever feel like reading about taxes can be well, taxing? We’re with you. That’s why we’re doing a quick bracket breakdown to help you understand how tax brackets work!
Tax brackets are like staircases.
The reason the concept of the brackets is tough to understand is that a better metaphor is a staircase. When you’re on the first step, you pay one tax rate. As you earn more and ascend to higher steps, you pay higher amounts of tax on your income.
There’s an overlapping effect, too.
Remember those Russian nesting dolls? Those cute little miniatures are also a great visual metaphor for how the income tax structure works. For the 2019-2020 tax year, there are seven tax brackets. The top tax bracket (the biggest doll) pays the highest percentage and the bottom income bracket (the smallest doll) pays the lowest tax rate.
But what about all those in-between dolls? Take your income for the year, let’s say $58,000, and you’re filing single.
- The first bit of your income, $0 to $9,700, gets taxed at 10%.
- The income you make between $9,701 to $39,475 gets taxed at 12%.
- From here, the bracket between $39,476 to $84,200 gets taxed at 22%.
And if you’re in higher brackets, it goes all the way up to 37% at the seventh tier, its highest.
So your tax rate is actually 3 tax rates at once. At its most basic level, this is the concept of tax brackets. So, back to your income- your $18,524 in income from the $39,476 to $58,000 bracket gets taxed at 22% whereas your other brackets of income get taxed at those lower rates. Luckily, there are all manner of deductions, credits and allowances that help you with that tax burden.
For a thorough understanding of how income taxes work, and how to file yours, it’s always best to speak with a tax professional. They can provide needed guidance and ensure you’re crossing all of your T’s and dotting your I’s when it comes to tax preparation.
Finances don’t have to be confusing.
Like many other aspects of finances, filing taxes can be confusing. If managing debt is making tax season even more stressful, consider working with a certified credit counselor — like those at CreditGUARD — to discuss your options. Credit counselors can’t help you file your taxes, but they can help you identify debt management solutions that can ease your financial burdens and put you back on track.
When paired with budgeting and financial education, enlisting the help of a credit counselor can be a wise strategy for taking control of your financial well-being.