Key Takeaways
  • When the federal government wants to determine how much each applicant must pay at the end of the year, they use tax brackets to determine the amount of taxes paid.
  • There are four types of filers, single, married and filing jointly, married but filing separately, and head of household, and depending on the type of filer, the tax brackets differ.
  • Below is an example that goes through how tax brackets are used to calculate the total taxes paid each year.
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Every year, between January 1 and April 15, one must file tax returns with the federal government. To aid them with determining the amount of taxes owed for each applicant, the federal government uses income tax brackets to determine the effective tax rate. Thus, knowing which federal tax bracket you fall under is crucial in knowing what portion of your annual income money will not be returned. 

 

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Definition of Tax Bracket

 

A tax bracket determines the amount of taxes paid by the filer depending on their income level. In the United States, a progressive tax system is used, meaning a marginal tax rate is used to help the government identify the amount of taxes paid for each income range. They use seven brackets with increasing percentages to calculate how much income the government can tax at each level.

 

There are four types of filers, single, married and filing jointly, married but filing separately, and head of household. Depending on the type of filer, different amounts will be taxed in each tax bracket. Below are the 2021 tax brackets and the respective percentages on which a filer’s income will be taxed. 

 

Tax Bracket

Tax Rate

Single Filer

Married, Filing Jointly

Married, Filing Separately

Head of Household

1

10 percent

Up to $9,950

Up to $19,900

Up to $9,950

Up to $14,200

2

12 percent

$9,951 to $40,525

$19,901 to $81,050

$9,951 to $40,525

$14,201 to $54,200

3

22 percent

$40,526 to $86,375

$81,051 to $172,750

$40,526 to $86,375

$54,201 to $86,350

4

24 percent

$86,376 to $164,925

$172,751 to $329,850

$86,376 to $164,925

$86,351 to $164,900

5

32 percent

$164,926 to $209,425

$329,851 to $418,850

$164,926 to $209,425

$164,901 to $209,400

6

35 percent

$209,426 to $523,600

$418,851 to $628,300

$209,426 to $314,150

$209,401 to $523,600

7

37 percent

$523,601 or more

$628,301 or more

$314,151 or more

$523,601 or more

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

How to Calculate the Amount of Tax Owed

 

Looking at this table, the different sets of numbers for the different filing statuses can make it confusing when determining how much total tax is owed to the government at the end of the year. Therefore, below is a walkthrough of how a single filer making $50,000 will be taxed with respect to the 2021 tax rates. 
 

Also, it is important to note that regardless of one’s income level or filing status, the same approach is used when calculating how much taxes must be paid to the federal government at the end of the year. 

 

Recommended Read: Filing Taxes on a Budget? Here Are 10 Options

 

Filing Status: Single Filer Income Level: $50,000

 

Tax Rate

Amount of Income Taxed

Owed Tax

Income Retained

10 percent

$9,950

$995 ($9,950 * 10 percent)

$8,955 (9,950 - $995)

12 percent

$30,574 ($40,526 - $9,951)

$3,669 ($30,574 * 12 percent) 

$26,605 ($30,574 - $3,669)

22 percent

$9,476 ($50,000 - $30,574 - $9,950)

$2,085 ($9,476 * 22 percent)

$7,391 ($9,476 - $2,085)

Total

$50,000 ($9,950 + $30,574 + $9,476)

$6,749 ($995 + $3,669 + $2,085)

$43,251 ($50,000 - $6,749)


 

 

 

 

 

 

 

 

 

 

 

 

In this scenario, the applicant is a single filer with an income level of $50,000, meaning the third column of the first table above will be used to calculate their total tax bill. 

 

Firstly, $9,950 of the $50,000 will be taxed at 10 percent, meaning their total owed tax so far will be $995. After this first tax bracket, there is still $40,050 of income that has yet to be taxed. 

 

The second bracket states income between $9,951 and $40,525 will be taxed at 12 percent. As this applicant’s income level exceeds the maximum threshold listed under this bracket, their income will be fully taxed at this level as well. This means that $30,574 of the $50,000 will be taxed at 12 percent, as the difference between $9,951 and $40,525 is $30,574. The tax owed will be $3,669 from this level, or, $4,664 thus far.

 

So far, $40,524 of $50,000 has been taxed, meaning the remaining $9,476 will be taxed at the 22 percent level. After multiplying the amount of income left over by the tax rate, the final owed tax figure within this bracket will be $2,085, or $6,749 in total. 

 

Therefore, a single filer who makes $50,000 a year will retain $43,251 after paying off all of their necessary taxes. Other factors will fluctuate the final income calculated above, so it is important to keep in mind that this number is an estimated figure and not an exact answer. 

 

How to Lower Amount of Taxes Paid
 

Sometimes, the amount of taxes one owes to the government may be too much, and the applicant may be trying to reduce it. Some applicants try to reduce their taxable income because the lower their taxable income, the fewer taxes they pay, and they can keep a larger portion of their money. If they wish to do so, two common techniques are used: tax deductions and tax credits. 

 

Recommended Read: Seven Options to Save You Money on Taxes in 2022 

 

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Tax Deductions

 

One of the most common ways people can reduce their tax liability and, thus, their amount owed, is through tax deductions. Tax deductions cause the taxable income to lower, resulting in lower taxes paid. For example, if a single filer filing their taxes had a taxable income of $90,000, their tax deduction of $5,000 would cause their taxable income to receive a reduction of $85,000. 

 

Per the first table shown above, the two taxable incomes of $90,000 and $85,000 are in two different tax brackets, meaning that the tax deduction has prevented the applicant from being taxed at a higher rate, allowing them to retain a larger portion of their annual income.
 

There are many different types of tax deductions that can be filled out and claimed when filing tax returns; and if you wish to see the full list of deductions, click here to see the whole list from the Internal Revenue Service (IRS) website. 

 

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Tax Credits

 

Another technique people use to lower their tax liability is tax credits. Tax credits work a bit differently than standard deductions, as they do not affect the taxable income. But instead, they are used to lower the tax amount owed directly. 

 

For example, if an applicant’s total tax amount owed is $5,000, yet they are entitled to a $3,000 tax credit, it results in the applicant having to pay $2,000, as the tax credit directly decreases the amount owed to the federal government. Similarly, if an individual owed $2,000 to the government and possessed a $3,000 tax credit, the federal government would have to reimburse the individual for $1,000. 
 

The government offers different credit programs, and depending on the number of credits one fills out on their tax return, the income subject to tax will change. Therefore, if you wish to see if you are eligible for credit programs the government offers, click here to look at the full list on the IRS website.
 

Recommended Read: Tax Professionals Can Save You Time and Money on Your Taxes

 

Benefits of Using Tax Deductions/Credits

 

The main benefit of taking advantage of using tax deductions/credits when filing tax returns is the money saved, which does not have to be paid back to the federal government. Instead, this money can be used for other expenses, such as living expenses and paying off debts like student loans.

 

On the other hand, the money saved can be utilized to generate future financial wealth by setting it aside in an investment account. The funds could then be used to invest in the stock market and potentially generate a profit in the long run.
 

Therefore, regardless of how the money is spent, it will most likely cause one’s financial situation to improve, which is why many people utilize these tax deductions/credits each year. 
 

Recommended Read: How to Spend Your Tax Refund Wisely

 

The Money Wrap-Up

 

When filing taxes, it is important to be aware of the tax brackets and how they work, as this knowledge could potentially lead to a lower amount of taxes paid to the federal government, and in some cases, receiving a tax return from the IRS. Therefore, by becoming aware of the government’s credit programs and how to apply and receive the benefits of tax deductions/credits, you can potentially save money instead of paying higher taxes each year. 

 

Disclaimer: The information regarding taxes and tax procedures should not be construed as expert advice. Always consult with a tax professional before making final changes to your tax return information.

 

Main Image Credit: enterlinedesign / Shutterstock.com

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