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How Income Tax Brackets Determine the Amount of Tax You Pay Each Year

The federal tax system used by the United States government has long been a source of confusion for many taxpayers, but it does not need to be this way for you. In reality, the basics of the system are quite a bit easier to grasp than you might have been told. Granted, you will get better results if you have a professional tax expert prepare your return for you, but by understanding the system in general you can certainly have a much stronger grasp on what is happening when you pay your taxes. The primary thing you want to understand is that not all of your income is actually taxable. Standard deductions and itemized deductions go a long way towards reducing the portion of your income that is considered taxable, as do personal exemptions that you can claim. Once these are subtracted from your annual income, the amount left over is considered to be your taxable income. It is from this figure that you will be taxed according to the income tax brackets that your income fits into. The bracket system is established by Congress, with assistance from the President, every few years. Currently, there are six brackets that top out at 35%, then down to 33%, 28%, 25%, 15% and finally, at the lowest end, 10%. Each year the levels at which the tax brackets begin and end are adjusted by the Internal Revenue Service to reflect changed in money valuation from the effects of inflation. This is done to keep taxation fair to the population as the value of the dollar fluctuates. While many people will say that the more money you make, the higher a percentage of tax you will pay, this is not literally true. Yes, at the higher income levels you will fit into a higher tax bracket and thus be subject to a higher percentage, but that does not mean that you pay that rate of tax for the highest income tax bracket that you fit in on all of the income you are taxed on. In other words, if a person earns several million dollars in a year they are indeed subject to a 35% tax rate, but not on all of their income. Only the income that fits into the highest bracket is taxed at 35%. The rest is taxed based on the bracket that it falls into. Thus, they end up paying taxes for the 10% bracket, the 15% bracket and so on. Armed with this information you are in now much better shape to figure out how income tax brackets can work in your favor once you understand them.