Welcome to our first segment on income taxes! In this blog post, we’ll break down the basic structure of the federal income tax system in the United States.
2/19/25 Understanding the Federal Income Tax System
The U.S. federal income tax system is progressive, which means that the more money you make, the higher the percentage of tax you’ll pay. But don’t worry, this doesn’t mean you pay the highest rate on all of your income. The tax system is structured in “brackets”—a series of tax rates that apply to specific portions of your income.
For example, in 2023, the tax brackets range from 10% to 37%. Here’s how they work:
1. 10% on the first portion of income – This is for low-income earners.
2. 12% to 37% – As your income increases, you move into higher tax brackets.
Each bracket applies only to the income within that range. For example, if you earn $60,000 a year, your income is taxed in portions:
· The first portion is taxed at 10%.
· The second portion is taxed at 12%, and so on.
This progressive tax system ensures that people with higher incomes pay more in taxes, but it also protects those with lower incomes from paying excessively.
Key takeaways:
· The U.S. income tax system uses brackets to tax portions of your income at different rates.
· Higher incomes are taxed at higher rates, but only on the income within each bracket.
Stay tuned for more tax tips in our next segment!
2/26/24 Tax Deductions vs. Tax Credits: What’s the Difference?
In today’s segment, we’re diving into two essential concepts that can help you reduce your tax bill: tax deductions and tax credits. While both reduce the amount of tax you owe, they work in different ways.
Tax Deductions:
A tax deduction reduces your taxable income. The lower your taxable income, the less you owe in taxes. Common deductions include:
· Standard deduction: A flat amount set by the IRS. For 2023, it’s $13,850 for individuals and $27,700 for married couples filing jointly.
· Itemized deductions: These include things like mortgage interest, state and local taxes, and medical expenses above a certain threshold.
When you take a deduction, you’re effectively lowering your income, which could move you to a lower tax bracket and save you money.
Tax Credits:
A tax credit, on the other hand, directly reduces the amount of tax you owe, dollar for dollar. There are two main types of tax credits:
· Nonrefundable credits: These can reduce your tax liability to zero, but not beyond. For example, if your tax bill is $500, and you have a $600 credit, you’ll only use $500 of the credit.
· Refundable credits: These can reduce your tax bill below zero, and you can get a refund for the difference. For example, the Earned Income Tax Credit (EITC) is refundable.
While deductions reduce your taxable income, credits directly reduce your tax liability. As you can imagine, tax credits are generally more valuable than tax deductions!
Key takeaways:
· Tax deductions lower your taxable income.
· Tax credits directly reduce your tax liability and are often more beneficial.
In the next segment, we’ll explore how to take advantage of these deductions and credits to lower your tax bill.
3/5/25 Filing Status: Why It’s Important and How to Choose the Right One
Today’s segment focuses on a crucial part of your tax return—your filing status. Your filing status determines the tax rates and deductions you can claim. It’s important to choose the correct status, as it impacts how much you pay in taxes.
Here are the main filing statuses:
1. Single: If you’re unmarried and don’t qualify for another status, you’ll file as single.
2. Married Filing Jointly: If you’re married, this is typically the best option. You and your spouse combine your income, and you get higher deduction limits and tax benefits.
3. Married Filing Separately: Some couples choose this if it’s more beneficial for specific reasons, like if one spouse has high medical expenses or you want to keep your finances separate. However, this status often comes with higher tax rates and fewer deductions.
4. Head of Household: If you’re unmarried, have a qualifying dependent, and pay more than half the cost of maintaining a home, you may be able to file as head of household. This status gives you a higher standard deduction and more favorable tax brackets.
5. Qualifying Widow(er) with Dependent Child: If your spouse has passed away and you have a dependent child, you can file as a qualifying widow(er) for up to two years after the year of death. This status allows you to use the same tax rates as married filing jointly.
Key takeaways:
· Your filing status affects your tax rates and deductions.
· Choose the filing status that best fits your situation to maximize your tax benefits.
In the next segment, we’ll cover another important topic—how to figure out your taxable income!
3/12/25 How to Calculate Your Taxable Income
In our final segment, we’ll show you how to calculate your taxable income—the amount of income that is actually subject to tax.
Here’s the basic process:
1. Start with your total income: This includes wages, salary, dividends, interest, and any other form of income you receive.
2. Subtract adjustments to income: These are expenses or contributions that reduce your total income. Common adjustments include student loan interest and contributions to retirement accounts like an IRA.
3. Apply your deductions: Next, you’ll subtract either the standard deduction or itemized deductions (whichever is higher) from your adjusted income.
4. The result is your taxable income: This is the income on which the IRS will apply tax rates.
For example, if you earn $50,000, take $5,000 in adjustments (like IRA contributions), and claim the standard deduction of $13,850, your taxable income will be $31,150.
Remember, the lower your taxable income, the less you owe in taxes!
Key takeaways:
· Taxable income is your total income minus any adjustments and deductions.
· The lower your taxable income, the less you owe in taxes.
