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What you need to know about tax categories in the USA in order not to pay too much

The tax category, or class of taxation (tax bracket) - one of the most difficult to understand aspects of the tax system. But ignorance of your category and how it works can seriously harm you as a taxpayer. It offers to understand this question. USA Today.

Фото: Depositphotos

“Over the past three days, two people have asked me the question:“ Is it true that having earned $ 100 more, I will move to the next tax class and will pay thousands of extra dollars in taxes? ”Says Chris Mulvani, CBIZ MHM Tax Director . “There is a misconception that all of your income will be taxed in the top category.”

As this question shows, many people believe that their maximum tax rate reflects the percentage they pay in taxes on all their income. In other words, a lone taxpayer with an annual income of $ 100 may mistakenly believe that his maximum rate of 000% applies to every dollar he earns.

But tax classes do not work that way. Instead, a person will pay 10% of their first income of $ 9700, then 12% of income in excess of $ 9700; 22% of income above $ 39; 470% will be the share of income above 24 dollars.

On the subject: A tax credit that millions of Americans don’t know about, missing out on the opportunity to get money

What is your actual tax rate?

In short, your maximum marginal rate reflects what you will pay on the portion of the revenue that falls into this upper segment, but your effective rate - or that you actually pay the IRS - is likely to be much lower due to stepped structure of this system.

“Thanks to the tax reform in 2018, there are 7 levels that you go through as your taxable income rises,” says Dina Payron, head of the global branch of EY TaxChat, Ernst & Young's tax preparation service. “Your actual tax rate will be in the middle of the category and, as a rule, much lower than your maximum marginal rate.”

Фото: Depositphotos

The problem, according to Pyron, is that a misunderstanding of how tax classes work can lead to an incorrect assessment of your tax situation. For example, if you think that you will pay the maximum marginal rate on all your income, you can overpay taxes during the year.

“Some people are really happy to receive a large tax refund, but I think that means you lost money during the year,” says Byron.

On the subject: 26 things to do now if you want to file a tax return on time

Tax Refund Myths

Refunds are another taxation problem that taxpayers misunderstand. Only half of Americans realize that the return is the money they have already paid (Credit Karma Tax study data). Many believe that compensation is paid at the expense of the government, not their own money.

The problem is that the IRS does not pay interest on the money that the Americans overpay: repayment only means that people provide the government with interest-free credit.

To determine the effective tax rate, you divide your total tax by your taxable income. The Jobs and Tax Reduction Act created new tax categories, along with many other changes that entered into force in 2018. This means that you may want to check your profit for 2018 or the data for this year to get an idea of ​​your most current effective tax rate.

It is also important to understand that the IRS usually makes changes to tax categories annually to adjust for changes in cost of living. For example, in November, the IRS released new tax classes for 2020 that affect your current income. However, your tax return of April 15th of this year will depend on the tax categories of 2019.

The scope of the categories has expanded slightly, with the lowest rate of 10% currently extending to income of up to $ 9875 for single applicants and $ 19 for couples filing applications together. In 750, these limits were $ 2019 for single individuals and $ 9700 for couples filing jointly.

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