02/21/2024 – Ep. 7
Marginal Tax Brackets
In the US, we operate under a federal marginal tax bracket system. What in the world does that mean? It’s actually quite simple – different portions of your income are taxed at different rates. Here’s an example:
Bill and Sally make a combined income of $100,000 each year. After claiming the standard deduction of $27,700 for married filing jointly taxpayers, their taxable income is $72,300 (this is the number they actually pay federal income tax on). The first $22,000 are taxed at 10%, and the income from $22,001 – $73,000 is taxed at 12%. Since the highest tax rate they fall under is the 12% marginal tax bracket, they are considered to have a marginal tax rate of 12%.
Although a taxpayer is classified in a specific marginal tax bracket, they often pay a lower percentage in federal tax than the stated rate. Let’s go back to our example:
Bill and Sally’s total tax for the year is calculated as follows:
– $22,000 * 10% = $2,200
– ($72,300 – $22,000) * 12% = $6,036
– $2,200 + $6,036 = $8,236
Effective tax rate is often a better measure of the tax we actually pay. For Bill and Sally, their effective tax rate would be 8.236% (calculated by $8,326 tax liability divided by $100,000 gross income). While earning more income can push a taxpayer into a new marginal tax bracket, it doesn’t mean that tax rate is applied to all of the income – it will only apply to the income that is in the new bracket.
02/28/2024 – Ep. 8
Mortgage Interest and Taxes
A common statement that we hear is, “I should keep my mortgage so that I can claim the tax deduction.” While it is true that mortgage interest counts as an itemized tax deduction, it’s not certain that it will actually lower your tax liability. Why is that? Ultimately, it comes down to whether a taxpayer utilizes the standard deduction or itemized deductions.
The standard deduction is a flat rate that the IRS allows all taxpayers to use. For married filing jointly taxpayers in 2023, the standard deduction was $27,700. It was $13,850 for a single filer. In order for mortgage interest to make an impact on a taxpayer’s federal tax return, their itemized deductions need to outpace the standard deduction. Other itemized deductions include state and local taxes paid (capped at $10,000) and charitable contributions. Approximately 90% of taxpayers utilize the standard deduction.
PRO TIP – Make sure to report all your itemized deductions, even if you fall under the standard deduction. Many states have standard deductions that are much lower than the federal deduction, and the itemized deductions can save additional money on your state return.
03/06/2024 – Ep. 9
Home Office Deductions for Employees
Since the onset of the pandemic, folks often ask if they can take a deduction for their home office if they work virtually. The answer? It depends!
For individuals that are W2 employees, they are not allowed to claim any type of home office expense against their income. Self-employed individuals, however, can claim this type of deduction. In order to do so, several criteria must be met. The office cannot be a multi-purpose room. To calculate the deduction, a taxpayer takes the square footage of the office and divides it by the square footage of the entire living space. They can then apply that percentage to their mortgage interest (or rent), property taxes, insurance, and necessary utilities.
Make sure to speak with your tax preparer when claiming the home office deduction to ensure that it is calculated correctly.
03/20/2024 – Ep. 9
Tax Extensions
Another common tax misconception is the following statement, “If I file an extension, I don’t have to worry about paying my tax liability until later on.” Not true! Even if a taxpayer files an extension, the estimated tax is still due by the tax filing deadline. Taxpayers can avoid a potential tax penalty by paying in 100% of the tax due in the year prior, or by paying in 90% of the tax due in the current year, whichever is less.
For taxpayers that often file an extension, it can be helpful to make estimated tax payments throughout the year to spread out the tax burden. It can be very difficult to be prepared for tax time when you only make one lump-sum payment near the deadline. Make sure to consult with your preparer on the best way to approach your individual situation.
