While many people are aware that we have different tax brackets in our country, they aren’t completely sure how they work. In the United States, we have a progressive tax system that uses tax brackets. When you hear the word progressive, you may think about liberal thinking and ideals. It isn’t the case when it comes to taxes. This simply means that the more money you make, the higher the tax bracket you will be in and the more taxes you will pay. Mark Dicus & Company is here today to talk about tax brackets so that you hopefully have a better understanding of them.
How Do Tax Brackets Work?
The way that tax brackets work can be somewhat confusing. When you make enough money that you fall into a higher tax bracket, it doesn’t mean that your entire income is going to be taxed at that higher percentage rate. Your income will taxed using a bracket where part of it will still be taxed using the lower bracket and only a portion, the higher amount of your income that got you into the higher bracket, will be taxed at the higher rate. This can be a misconception that leaves people feeling like they don’t want to make enough money to get into that higher bracket because they will be penalized, but that isn’t true. Think of it as a piggy bank. Once you have filled your piggy bank, you move the rest of your money to a different bank. Only that money will fit in there. It’s the same with the tax brackets. Up to a certain amount of money you will be paying taxes at a lower rate. Once you reach that higher rate that puts you into a different bracket will you pay the higher rate, and you will only pay that higher rate on the money that doesn’t fit into the lower bracket any longer.
How to Make Tax Decisions Based on Brackets
When you understand how tax brackets work, you can make different tax decisions based on your needs. When you lower your taxable income, you can potentially make the same amount of money but fall into a lower tax bracket. Here are some ways to do that:
– Contribute more to your retirement accounts.
– Itemize your deductions rather than taking the standard deduction.
– You can contribute more to 529 college funds and prepaid plans.
– For those that have a Flex spending account or a health savings account, you can contribute more money to those accounts since they are tax free.
Bookkeepers, Accountants & More in Summerlin, North LV, Henderson, Lone Mountain Village & Greater Las Vegas, Nevada
If you are looking for ways that you can lower your taxable income, talking to the accountants at Mark Dicus & Company is a good way to do it. We can help walk you through your finances as we work to help you find ways to keep money in your pockets and out of the pockets of the federal government. Call us today!