What determines how much your taxes are?

The amount of taxable income you have determines what your tax bill will be. Marginal tax rates determine how taxable income is taxed, and those who pay income taxes are divided into different ranges known as tax brackets. Then, income in each category is taxed at a specific rate. Your IRS forms (or your tax software) will allow you to subtract what you paid in taxes throughout the year from what you owe.

If you paid too much money, you'll get a tax refund. If you didn't pay enough, you'll have a debt to the IRS. If you have multiple sources of income, you should keep in mind that they are taxed together, not separately. The IRS analyzes the total amount of income you received in the tax year and this is how it determines your tax bracket.

Instead, you pay the lowest tax rate up to the limit of the lowest tax bracket, then the next lowest tax rate up to your limit, and so on until you reach your total taxable income. You can have a lower taxable income if you have less taxable income, if you take advantage of more tax deductions, or a combination of both. The marital penalty is not a real penalty; it is a peculiarity of the progressive tax system that occurs when each spouse is individually in the same marginal tax bracket and the combination of their income takes them to the next higher level. Federal tax categories will guide you in your search to determine how much you pay taxes for each additional dollar of income you earn (i).

However, you can lower your taxable income (that is, the amount of income you can pay taxes on) by requesting certain tax deductions. Even a taxpayer in the higher category has a portion of their income taxed at the lowest rates on the tax list. Using a different set of tax brackets, the IRS taxes these net capital gains at much more favorable rates than regular income. The first results in a tax bill for the amount you owe and the second results in a tax refund for the amount you overpaid.

Regardless of the type of income you earn or what marginal tax category you're in, your goal should be to lower your effective tax rate as much as possible. If your tax rate according to the second calculation is higher, you must pay the amount of income that exceeds the first calculation to the AMT. The last major federal tax reform, the Tax Reform Act of 1986, reduced the number of tranches from 16 to two, but that number has increased to the current seven in the past three decades. By analyzing the importance of these two tax rates, your circumstance will determine which is more important.

Deciding how to take your deductions, that is, how much to subtract from your adjusted gross income, thus reducing your taxable income, can make a big difference to your tax bill. Contacting a Polston Tax tax professional and having them handle your tax calculations can simplify the process and ensure that every step is managed correctly. The standard deduction is a fixed reduction in your adjusted gross income, the amount determined by Congress and intended to keep up with inflation. Because of this, the AMT rate is usually lower than your marginal tax rate at similar income levels.