Knowing your tax bracket and tax rate is the very beginning stage of keeping as much of your hard earned money during tax time. In 2012, the American Taxpayer Relief Act dramatically changed the tax bracket system. The first step you have to take to get the most out of tax season is to know which bracket you fall into and which category you need to file under. From there, you will take advantage of all the tax deductions and tax credits legally available to you. If you are not sure about anything, ask for advice from a tax professional and use an income tax calculator.
What’s a Tax Bracket?
Tax brackets are a system the US uses to determine how much you are taxed. Your tax bracket determines how much money you owe to the IRS or how much of a tax refund you will receive. Tax brackets are based on your income level. Different amounts are taxed at different tax rates.
How Many Federal Tax Brackets?
There are seven individual income-based federal tax brackets for 2016. Brackets range from those who do not have any taxable income to the wealthiest individuals, who earn $441,001 or more in the tax year.
What Tax Bracket Am I In?
Your tax bracket is based on your tax-filing status and your income level. To quickly figure out which IRS tax bracket you are in, take a look at the IRS tax table for 2016:
2016 Tax Brackets for Income Taxes Filed by April 18, 2017
|Tax Bracket||Single||Married Filing Jointly or Qualifying Widow(er)||Married Filing Separately||Head of Household|
|10%||$0 to $9,275||$0 to $18,550||$0 to $9,275||$0 to $13,250|
|15%||$9,276 to $37,650||$18,551 to $75,300||$9,276 to $37,650||$13,251 to $50,400|
|25%||$37,651 to $91,150||$75,301 to $151,900||$37,651 to $75,950||$50,401 to $130,150|
|28%||$91,151 to $190,150||$151,901 to $231,450||$75,951 to $115,725||$130,151 to $210,800|
|33%||$190,151 to $ 413,350||$231,451 to $413,350||$115,726 to $206,675||$210,801 to $413,350|
|35%||$413,351 to $415,050||$413,351 to $466,950||$206,676 to $233,475||$413,351 to $441,000|
|39.6%||$415,051 or more||$466,951 or more||$233,476 or more||$441,001 or more|
The Different Tax-Filing Statuses
There are four main tax-filing categories:
- Married Filing Jointly (MFJ) or surviving spouses
- Married Filing Separately (MFS)
- Head of Household
Who Qualifies as Head of Household?
You could qualify as Head of Household if you meet all of the following requirements:
- You’re unmarried, or considered unmarried.
- You paid more than half the cost of keeping up a home.
- A qualifying person lived with you for more than six months out of the tax year.
- If the qualifying person you claim is a parent, s/he does not need to live with you.
If you qualify as head of household, your 2016 tax rate will be lower and your standard deduction will be higher than if you file as “single” or “married filing separately”.
Ways to Lower Taxable Income Other Than Deductions
You can contribute to tax-deferred retirement accounts, such as a 401k or IRA. This can help you reduce thousands off your taxable income. You will have to pay taxes when that money is withdrawn, but you will have even more ways to lower your tax bracket once when you retire. For instance, medical expenses like in-home care and prescription medication are all tax-deductible.
For people with low earned income, the earned income tax credit (EIC) reduces your tax liability and could potentially result in a tax refund. To qualify for the EIC, you must have wages or business income.
Recent Changes to the Bracket System
The government made adjustments for inflation on more than 50 tax provisions in 2016, which affects every tax bracket. The 2016 personal exemption amount increased by $50 to $4,050, up from the 2015 exemption of $4,000. However, the personal exemption starts to phase-out with adjusted gross incomes of $259,400 and completely phases out at $381,900.
Can I Deduct to a Lower Tax Bracket?
Yes. The IRS allows taxpayers to reduce taxable income by taking a wide range of legal tax deductions, such as charitable contributions, home business expenses, and education-related costs
What’s the Marginal Tax Rate for People with Different Incomes in the Same Bracket?
Taxpayers in the lowest tax bracket pay a flat rate of 10 percent in every filing category. Taxpayers in the remaining brackets pay a flat rate that is applicable to everyone in that particular bracket, and then a percentage of the income they earn over the next higher bracket’s minimum. For example, Single filers who earn between $37,651 and $91,150 will pay $5,183.75 plus 25 percent of any amount over $37,650.
Do States Also Use a Tax Bracket System?
Tax structures, rates, deductions and exemptions vary greatly from state to state. Some states have a multi-tiered bracket system. Other states impose a flat tax for all income levels. And there are some states that do not levy any income tax at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
When Is It Better to File MFJ?
Generally speaking, it is better to file MFJ because taxes are lower and the standard deduction is higher. There are also more credits and deductions available for MFJ returns. It makes sense to file jointly when each spouse earns about the same income. To figure out whether it is more advantageous to file jointly or separately, you may want to prepare your tax returns both ways, and then compare them side-by-side. Then you can decide which method is better.
When Is It Better to File MFS?
Couples who have lopsided incomes or assets and plan on itemizing deductions should seek professional advice on how to answer this complicated question. Couples should consider filing separately if filing MFJ bumps them into a higher tax bracket. However, MFS is usually less advantageous than MFJ due to the elimination of some tax benefits, such as certain child tax credits, and reductions in the phase-out limit on contributions to retirement plans.
Is Married Filed Separately Essentially the Same as If the Partners Had Filed as Single Taxpayers?
No. Couples married filing separately means each partner acknowledges the marriage, but files separate tax returns. They do not take legal responsibility for each other’s tax returns. In other words, their incomes are not lumped together.