Tax time is quickly approaching. Understanding tax law and correct tax filing can be a difficult mental and legal maze to navigate. Tax brackets and tax rates are not the same thing. Income levels, or tax brackets, are used to determine tax rates and most people will be taxed at more than one rate. There are qualified tax specialists at Tax Crisis Institute to navigate tax brackets and tax rates for you.
What Are Tax Brackets?
Tax brackets actually represent income levels. Those income levels are used to determine the rate at which you are taxed. The lower the tax bracket you fall into, the lower the rate at which you are taxed. The greater your tax bracket the higher the rate at which you are taxed. The IRS uses tax brackets to apply a progressive tax. As your income passes through each tax bracket you pay taxes at a higher tax rate for each bracket you fall into. Most people will fall into two or more tax brackets imposing two or more tax rates on their taxable income. For the 2020 tax year, there are seven tax brackets with tax rates ranging from the lowest tax rate of 10% to the highest tax rate of 37%.
How Do Tax Brackets Work?
Your tax bracket(s) is determined from your total taxable income (total of earned income and investment income minus allowable adjustments and deductions). If your total taxable income falls within the lowest tax bracket you will only be taxed at the lowest tax rate of 10%. If your total taxable income is more than the lowest taxable amount you will have more than one tax rate. Your tax rates will increase incrementally relative to your total taxable income. Because tax brackets are subject to change for each tax year as are tax rates, be sure to check tax rates for the year for which you are filing.
How Are Tax Brackets Structured?
Tax brackets are not based on your gross income but on your taxable income. You will need to determine your combined total earned income and total investment income. Subtract from that any adjustments and/or deductions you are entitled to. This is your taxable income. The next step is to determine your correct filing status. The options for filing status are: single, head of household, married filing jointly, married filing single, and qualifying widow. If unsure about which is best for you, a tax specialist can help you make that determination.
For reference see below the 2020 tax brackets and tax rates for filing Single and for Married Filing Jointly. Information on tax brackets and tax rates for additional filing statuses can be found online.
|Tax Rate||Taxable Income|
Married Filing Jointly
|10%||Up to $9,875||Up to $19,750|
|12%||$9,876 – $40,125||$19,751 – $80,250|
|22%||$40,126 – $85,525||$80,251 – $171,050|
|24%||$85,526 – $163,300||$171,051 – $326,600|
|32%||$163,301 – $207,350||$326,601 – $414,700|
|34%||$207,351 – $518,400||$414,701 – $622,050|
|37%||Over $518,400||Over $622.050|
If your income is in the highest listed tax bracket, your overall tax rate will not be 37%. The way tax brackets are structured, if you are filing single you will pay 10% on the first $9,875 you earn in 2020. Your tax rate will increase to 12% on your taxable income of $9,876 – $40,125, 22% on income of $40,126 to $85,525, and so on up to 37% on income over $518,400.
Is It Possible To Lower My Tax Bracket?
The most obvious way to reduce your tax bracket is to reduce your income. But who wants to do that? It is possible to reduce your taxable income and lower your tax liability without reducing your actual income. Some of the ways to do so are:
- Get married. If you are planning a wedding, getting married before December 31 will change your filing status to married which will change your tax bracket and your tax liability.
- Invest in an employer-sponsored retirement plan.
- Purchase property. The mortgage interest and taxes are tax deductions.
- Open an IRA and contribute as much as you are able up to the maximum allowable amount.
- Evaluate your investments and structure for tax purposes. Consult with a tax specialist for advice.
- Consider opening a small business doing something you enjoy.
Before you begin a strategy for reducing your tax bracket and thereby your tax rate, you should consult a tax specialist for advice. The experts at Tax Crisis Institute are available to advise you.
Can I Lower My Tax Bracket By Making A Donation?
That’s a complicated question. You can lower your tax bracket by making a qualified donation to a qualified charitable organization. Donations can be financial, or goods and services. You will need a statement from the organization confirming your donation. Be sure to also keep a record of your donation. In the past contributions cannot exceed 60% of your adjusted gross income. However, for the 2020 tax year, the IRS is allowing a contribution of up to 100% of your adjusted gross income. If you receive goods or services such as a raffle ticket, event attendance, or another such tangible item for your contribution you may not claim it as a donation. Before including a gift on your tax return, check with a tax specialist to confirm that both the organization and the contribution qualify as a tax deduction.
You may not lower your tax bracket by giving a gift to a family member regardless of the nature of the gift. Neither money nor assets are allowed as a qualified deduction to family members. In fact, if you give a family member more than $15,000 you are required to report it. They will be required to claim it as income, and pay a gift tax on it.
Tax Crisis Institute has been a tax relief leader for over 30 years. When you work with the Tax Crisis Institute, we’ll make sure you don’t pay anything more than you owe!
Call Tax Crisis Institute today for a FREE consultation!