Business Federal Income Tax Definition
The American tax system isn't known for being the most straightforward set of laws and processes to follow, and being responsible for determining what you owe each year can seem confusing — if not a little anxiety-inducing, too. Fortunately, you can quell some of your tax-time worries by understanding how to estimate your yearly taxes. This way, you can better anticipate how your money will be taxed, what you'll owe and even what you might get back from the government in the form of a refund. Learn more about paying taxes in the U.S. at the federal level, along with how to approximate your tax numbers.
The United States has what's called a progressive tax system. This means that there are different income levels that get taxed at progressively higher rates so paying taxes is less of a financial burden on people who earn less money. These levels are called brackets, and each one has a different percentage associated with it. This percentage is the amount that's owed in taxes on any income that falls within the boundaries of the bracket.
When you understand brackets, you'll have an easier time estimating what you may owe. Each tax bracket encompasses a dollar-amount range and serves as a cutoff point for the next percentage level of taxation. You only pay the tax bracket's percentage on the amount of your income that falls into that bracket.
How Do Brackets Work?
To better understand brackets, it can help to see an example. Imagine that there are four brackets: $0–$10,000, which is taxed at 0%; $10,001–$20,000, which is taxed at 15%; $20,001–$30,000, which is taxed at 20%; and any income over $30,000, which is taxed at 25%. If you earn $9,000 a year in this example, you won't owe taxes on it. If you earn $15,000 a year in this example, you'll pay 15% in taxes on any amount over $10,000 — $750, which is 15% of $5,000.
If you earn $40,000 a year, the situation gets a bit more complicated. You won't pay any taxes on the first $10,000, which leaves $30,000 in taxable income. You'll pay 15% in taxes on the $10,000 that accounts for the money you earn between $10,001–$20,000, for a total of $1,500. Then, you'll pay 20% on the $10,000 that falls between $20,001–$30,000, which is about $2,000. Finally, you'll pay 25% on the remaining $9,999 for the $30,001–$40,000 amount of your income, which is a total of about $2,500. You don't pay 25% on your entire income just because the total falls into that bracket.
Only the amount of income that falls within a particular bracket is taxed at that bracket's percentage rate. If you have a set salary and you look up a particular tax year's bracket rates — the government changes them sometimes, so it's important to check — you should have a relatively easy time estimating a general figure for what you'll pay in taxes.
Reducing Your Tax Liability With Deductions
For most taxpayers, there are some ways to reduce the portion of income that's taxable. These are called deductions, and they can lower your overall tax burden so you don't have to pay as much. One of the better-known of these is called the standard deduction, which is a set dollar amount you can subtract from your income amount before calculating what you owe in taxes on that income. This makes it so that your taxable income is usually less than the total income you earned for the year you're filing taxes.
Using the example in the section above, imagine now that the standard deduction is $10,000. You subtract this from your taxable income. This reduces your taxable income to $30,000 from $40,000. As a result, you'll no longer pay the 25% tax on the $9,999 of your income between $30,001 and $40,000 because only $30,000 of your income is taxable. Instead, you'll pay $3,500 in taxes, which accounts for the 15% and 20% tax rates on your income that falls into two brackets between the $10,001 and $30,000 you earned.
Unless you choose to itemize your tax return, which means you subtract individual amounts from different categories of expenses to lower your tax liability, you can better estimate your yearly taxes by subtracting the standard deduction before looking at bracket ranges.
Another way to reduce what you pay in taxes is to apply tax credits. These differ slightly from deductions. Whereas deductions are amounts you subtract from your income total before you calculate the taxes on it, tax credits are amounts you can subtract from the total amount you owe after you've calculated your tax burden.
Some of the common tax credits in the United States are related to dependent adults and children, education payments and the costs of homeownership. If you want to get your estimation narrowed down even further, you can determine which credits you're eligible for.
Again, let's use the numbers from the above examples. You've calculated that you'll pay about $3,500 in taxes based on your $40,000 income and the fact that you're claiming the standard deduction. You also have a child who meets certain criteria, and this makes you eligible to claim a childcare tax credit that's worth $700. You'll subtract this $700 from $3,500 for a reduced total of $2,800.
Notice that you don't subtract the $700 from the $30,000 of your taxable income. You wait until you've calculated the amount you owe and subtract credits from that, not from the amount you've earned. Deductions come before, and credits come after. Take some time to research available credits and whether you might qualify for them if you're looking to get closer in your estimation.
MORE FROM ASKMONEY.COM
Business Federal Income Tax Definition
Source: https://www.askmoney.com/taxes/how-to-estimate-your-yearly-taxes-based-on-your-income?utm_content=params%3Ao%3D1465803%26ad%3DdirN%26qo%3DserpIndex
0 Response to "Business Federal Income Tax Definition"
Post a Comment