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 hurt you as a taxpayer. Suggests to understand this issue USA Today.

Фото: Depositphotos

“In the last three days, two people have asked me, 'Is it true that if I make $100 more, I'll move up into the next tax bracket and pay thousands of extra dollars in taxes?'” says Chris Mulvaney, tax director at CBIZ MHM. . “There is a misconception that all your income will be taxed in the top bracket.”

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.

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What is your actual tax rate?

In short, your top marginal rate reflects what you'll pay on the portion of your income that falls into that top bracket, but your effective rate—or what you actually pay the IRS—will likely be much lower due to step structure of this system.

“With the 2018 tax reform, there are 7 tiers you go through as your taxable income increases,” says Dina Pyron, global leader for EY TaxChat, a tax preparation service from Ernst & Young. “Your effective tax rate will be in the middle of the bracket and typically well below your top 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 get a big tax refund, but I think that means you lost money during the year,” Pyron says.

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Tax Refund Myths

Returns are another tax issue that is misunderstood by taxpayers. Only half of Americans understand that the refund is money they have already paid, according to a study by Credit Karma Tax. Many people believe that the reimbursement comes from the government and not from 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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