Here at Tax Crisis Institute (TCI) we are here to help you navigate the tax laws of 2019. There’s a lot of changes that have been happening in the world of taxes and with the date of April 15 fast approaching.
Tax breaks happen at several intervals. Starting with 12% and going up from there. If you are in the top tier you can be taxed at upwards of 37%. This does happen in tiers though. So your whole income isn’t taxed at 32% if you make $200,000 as a couple filing jointly. Only the income from $171,051 to $200,000 would be taxed at 32%.
Below we discuss how taxes are calculated and how you can best move forward with adjustments needed for your taxes.
Why Do We Pay Taxes?
Taxes are the money that the government takes from your paycheck in order to run. In 2017 the Internal Revenue Services collected $3.4 trillion in taxes. Of that $437 billion was returned to the American public.
This means that the American public gave the United States government $437 billion in an interest-free loan. There are two schools of thought with this.
- Have extra money taken out of your paychecks so at the end of the year you get a large return. People use this money for things like down payments on new cars or renovations to their house.
- That they want to give the government the least amount of money possible. They want to be in charge of their money using it or saving it in a way that they are in control.
Both are great ideas, it’s really what works best for you and your family.
The Different Tax Brackets
Tax brackets are the range of income that can be taxed at a specific amount. These percentages are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. There are several ways to file, single, married filing jointly, married filing separate, and head of household.
Marginal Tax Rates
First, we should start explaining what the tax brackets are. Taxes are based on how much you make, however, if you fall in a 22% tax bracket not all of your income is taxed at 22%. The first $9,700 (or $19,400 for married couples filing jointly) is taxed at a 10% tax rate. Any income made between $9,701 to $39,475 (or $78,950 for married couples filing jointly) is taxed at 12%. This is called marginal tax rates.
The list of marginal rates is located here.
Here is a copy of the tax tables for 2019. This will tell you what each dollar is taxed at.
Effective Tax Rates
Once you’ve calculated your marginal taxes your effective tax rate combines all you owe in taxes divided by how much you made total to get the effective tax.
Say you are a single filing you would pay $970 at the 10% tax rate and you pay $3,516 for a total income of $39,000. Your effective tax rate is $3,516 + $970 = $4,486. Then you take what you’ve paid in taxes divided by the total $39,000 you made in 2019 for an effective tax rate of 11.5%.
Calculating Your Tax Bill
Your effective tax rates don’t account for deductions. Once you adjust for deductions your overall taxes would look more like this.
$39,000 – $12,000 = $27,000
10% tax rate $970
12% tax rate $2,076
Totaling $3,046 paid in taxes. This would mean that 7.8% of your total income went to the government paid in taxes.
How Family Size Affects Your Tax Bracket
Your family size can affect your tax bracket in many ways. One major way your tax bracket changes with the family size is by increasing your poverty line. As your family size increases, your poverty line lowers. This is done because larger families need more of their income devoted to those dependents that they have listed on top of their normal household expenses. The rates are determined by taking an average.
For instance, say a reference family is set at making $50,000 annually. A larger family that needs 50% more income for their dependents would be in the same bracket if they were making $75,000 annually as the reference family making $50,000. These rates change yearly and can be found on many tax sites. If you have questions about how your family size changes your tax bracket feel free to call the Tax Crisis Institute and talk to one of our tax professionals today.
Deductions You Can Take to Reduce Your Tax Bracket
A deduction decreases the amount of your income you are taxed on. The more you reduce the amount of your income available to be taxed, the lower your tax bill will be. Here are some of the more popular tax deductions with how much they reduce your taxable income by:
- Interest on student loans: up to $2500
- Child credit: up to $2000 per child and $500 for non-dependent
- Adoption: Up to roughly $14,000 in adoption costs per child
- Earned tax credit: up to $6660 depending on your number of dependents
- Charitable gifts: you may subtract the amount you’ve donated
- Mortgage interest: reduces taxable income by the amount of interest paid
- Traditional IRA: This one can be tricky and we recommend calling a tax professional to determine how much and the circumstances
- Home office deduction: you can deduct a percentage of the living expenses of the home in which you live if you work from home
- Self-employment: self-employed persons may deduct many of their business-related expenses including travel and supplies. Talk with a professional if there’s any question whether or not you should deduct an expense
- Residential Energy: up to 30% of the installation of solar energy systems
Contact us Today
Tax brackets are set by Congress, however, occasionally there needs to be an adjustment for inflation. This job falls to the IRS. In 2019, they made this adjustment so when it came time to pay (or get back) your 2019 taxes the adjustments took effect. Please schedule a time to talk with one of our tax professionals. We’ll be happy to help you get your taxes filed this year and provide you the maximum refund allowed. Contact us now so we can get started.