Here we are, kicking off the tax season once again. Everyone knows you have to pay taxes on your income, but how familiar are you with the tax system?
The deadline for filing your 2024 tax returns for most taxpayers is April 15, however, you are able to request an extension, which gives you an additional six months to submit your return. It is important to remember that this extension does not apply to paying the taxes that you may owe.
Calculating income is the first challenge of a tax return. Income from all sources is added up to arrive at the adjusted gross income, commonly referred to as AGI. This will include interest and dividend income, business income, (or losses) and other items that are considered “above the line.” “The line” in this reference is the AGI. Everything else happens below this line.
Every taxpayer is entitled to a standard deduction, which reduces your taxable income, meaning you are only taxed on the income that exceeds this amount. For the 2024 tax year, the standard deduction amount is $14,600 for single filers and $29,200 for married couples filing jointly. So, if you had $50,000 in adjusted gross income and you file as a single filer, you would subtract the standard deduction, leaving you with $35,400 in taxable income.
Tax Credits also help lessen the amount of tax you owe. Unlike a deduction, which reduces your taxable income, a tax credit directly reduces the tax you pay.
In the United States, the federal income tax system is progressive, which means the rate you pay increases as your income rises. The IRS sets different tax rates for different ranges of income, called tax brackets. The tax brackets determine the rate at which different portions of your income are taxed. If your taxable income falls into a higher tax bracket, only the portion of your income that falls within that bracket is taxed at the higher rate.
Every year the IRS adjusts tax brackets to account for inflation. For 2024, the tax brackets are slightly different than in previous years, which could affect how much tax you owe.
Taxes are calculated on a marginal tax rate. The rate is applied to the last dollar you earn in a given bracket, not your entire income. For example, if you are a single filer with a taxable income of $50,000, the first $11,600 of that will be taxed at 10%. The income from $11,601 to $47,150 will be taxed at 12%, the remaining $2,850 will be taxed at 22%. Your tax bill would be about $6,053. The highest tax rate you pay only applies to the top portion of your income.
Many people mistakenly think they didn’t pay taxes because they didn’t have to write a check after filing their return or they were due a refund. However, refunds are basically interest free loans to the government. If this is the case, you might consider adjusting your withholdings. The goal of an accurate tax return would be to owe (after all withholdings) or receive less than $100.
The U.S. tax system can be complicated, marked by loopholes, disparities, and other inefficiencies. If you are ever confused about how to file your taxes or what you owe taxes on, reach out to us.
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