What you need to know about tax categories in the USA in order not to pay too much
The tax bracket, or tax bracket, is one of the most difficult aspects of the tax system to understand. But not knowing your category and how it works can seriously harm you as a taxpayer. To understand this issue suggests USA Today.
“In the past three days, two people have asked me the question:“ Is it true that after earning $ 100 more, I will move to the next class of taxation and pay thousands of additional dollars in taxes? ”Says Chris Mulvaney, Tax Director of CBIZ MHM ... "There is a misconception that all of your income will be taxed in the top tier."
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.
What is your actual tax rate?
In short, your maximum marginal rate reflects what you will pay on the portion of income that falls into this upper segment, but your effective rate - or what you actually pay the IRS - is likely to be much lower due to step structure of this system.
“With the 2018 tax reform, there are 7 tiers that you go through as taxable income increases,” says Dina Pyron, Global Head of EY TaxChat, Ernst & Young's Tax Preparation Services. "Your actual tax rate will be in the middle of the category and generally well below your maximum marginal rate."
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 get a big tax refund, but I believe that means you lost money within a year,” says Pyron.
On the subject: 26 things to do now if you want to file a tax return on time
Tax Refund Myths
Refunds are another tax issue that taxpayers misunderstand. Only half of Americans understand that refunds are money they have already paid (data from Credit Karma Tax research). Many believe that the reimbursement is paid by 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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