How Do Taxes Work?

 
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A tax is a citizen’s contribution to the state’s or country’s revenue. It can be based on the citizen’s income and business profit. Taxes can also be on goods, foods, services, and even transactions.

What is an income tax?

Income tax, is a taxed placed directly on the income of a citizen. It is typically based on the annual income, and is given to the government.

What Are the Tax Brackets?

Most people believe that tax brackets are determined by how much money one makes. However, that is not true. A tax bracket is the tax rate paid on the largest amount of taxable income. Therefore, money earned is directly affected by the tax rate and the taxes had on any additional income.

So, What Tax Bracket Am I in?

Here are some examples:

For instance, if the taxable income is $9,200, that is less than $9,325; therefore, the tax rate is 10%. Meaning about $920 in income tax.

It gets tricky when one starts making more money.

For instance, if taxable income is $26,500. That is less than $37,950, which means that the tax rate is 15%. Now, this does not mean that all the income is taxed at 15%.

One must pay the designated 10% on the first $9,325 and then will pay 15% on what is leftover.

$9,325 x .10= $932.50

$26,500 -$9,325= $17,175

$17,175 x .15= $2,576.25

Total income tax on is $2,576.25. If the government were to tax income of $26,500 at 15%, one would be paying $3,975 in income taxes. So, the method the government now uses to calculate the tax brackets and income taxes, may actually save money in the long run.

What if someone has over $100,000 in taxable income?

If the taxable income is $147,000, for example, then one would have a 28% tax rate because the taxable income is less than $191,650.

One will pay the designated 10% on the $9,325. They will pay 15% on the amount between $9,325 and $37,950, 25% on the amount between $37,951 and $91,900, and lastly, they will pay 28% on the amount over $91,901.

$9,325 x .10= $932.50

($37,950- $9,325) x .15= $4,293.75

($91,900- $37,950) x .25= $13,487.50

($115,000- $91,900) x .28= $6,468

$932.50+ $4,293.75+ $13,487.50+ $6,468= $25,181.75= total income tax.

If someone were taxed 28% on a taxable income of 28%, they would be paying $41,160 in income taxes.

Follow this same method to determine income tax, based on taxable income. The rate is based on your fining status and income. There are several sites that you can use to automatically do the math, quickly and easily.

 

How are Tax Returns Calculated?

When you are paid by your employer, you may notice that there is a significant portion of your paycheck missing. This is because the federal government has implemented a way to make sure that they are getting money: withholding. Withholding, is the amount that is “withheld” by an employer and given to the federal government as a portion of income tax. The money from your paycheck is deposited from your employer, to the Federal Reserve Bank.

Now, the amount you get back on your tax return is determined by a number of factors. The number of dependents you claim, your taxable income, your filing status, and the credits and deductions you are eligible for, all determine what your tax return will be.

It is possible to get 100% of your taxes back if you make less than a certain amount each year, according to filing status:

  • Single, and making less than $9,370
  • Head of household, making less than $12,000
  • 65+, making less than $13,450
  • Married, filing together, under 65, making less than $18,700

Your tax return is a refund of excess amounts you’ve paid to state or federal governments within the last year. The percentages withheld range from 10%-35%, based on income. If you claim any deductions, those amounts come out of your income and may therefore reduce your tax return.

The idea of taxes can be overwhelming, especially if you don’t know what any of the terms mean. If you plan to live in the United States, it is important that you learn the basics. Money will be taken out of each paycheck you receive. You can opt to have more withheld per check, so that your tax return is larger, or not. If you do not trust yourself to make all the necessary calculations, concerning taxes, take them to a licensed tax preparer and pay to have them do everything correctly so that you get exactly what you are owed.

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