Paying taxes, while sometimes painful, is both required and likely unavoidable. So, understanding the general components of the federal income tax system is beneficial if you are looking for ways to reduce your tax liability. Knowing your tax bracket and working with a professional tax advisor can help you develop and implement a strategic plan to lower the amount of tax you owe and allow you more control over where your income goes.
Determining your tax bracket.
The US tax system is based on a progressive tax system, meaning that as a taxpayer's income increases, so does their tax rate. For the tax year 2022, the federal income tax brackets and rates for individuals ranged from 10%-37%.
It's important to note that these rates apply to taxable income, which is the amount of income remaining after allowable deductions and exemptions have been applied. There are 3 main components to determining your tax bracket.
- Determine your filing status. The 4 filing status categories include: Single, Married filing jointly, Married filing single, and Head of household.
- Total your income from all sources including income from wages, investments, interest, dividends, and even gambling winnings.
- Subtract your allowable deductions and expenses from your total income. This amount is your taxable which you will use to determine your tax bracket and subsequently your marginal tax rate.
What is Marginal Tax Rate?
Marginal tax rate refers to the rate at which an additional dollar of income is taxed. It is the highest tax rate that a taxpayer will pay on their income. In other words, it is the rate applied to the last dollar earned in a given tax bracket.
For example, if a taxpayer's taxable income falls within the 22% tax bracket, their marginal tax rate is 22%. This means that for every additional dollar earned within that bracket, 22 cents will be paid in federal income tax. You can view the federal income tax brackets here. (The tax brackets and rates are subject to change each year due to inflation adjustments and changes in tax laws.)
It is important to note that marginal tax rates are progressive, meaning that as your income increases, the tax rate also increases. Taxpayers may also be subject to different tax brackets, each with its own marginal tax rate.
It is important to note that just knowing your tax bracket and marginal tax rate does not change the amount of your tax liability, but once you have this information, you can begin to plan and implement strategies that will allow you more control over your income.
DBA can help.
We recommend consulting a tax professional to determine the most accurate and up-to-date tax information for your situation. At DBA, we can help you with strategies to achieve your financial goals and reduce your tax liability. Contact our team with any questions you may have.