Taxes are an important part of life in the United States, and understanding the different tax brackets is essential for filing your taxes correctly. The federal income tax system currently has seven brackets, with rates ranging from 10% to 37%. President Joe Biden has proposed to increase the top rate to 39.6%.Your tax bracket depends on your taxable income and your civil tax status. Single taxpayers who have dependents must file their return as a “head of household”, while joint filing generally provides a tax exemption.
It's important to note that not all income is treated the same, as the more you earn, the higher the percentage at which you end up contributing in taxes. Taxable income is calculated after all deductions have been accounted for and tax credits have been granted. Your highest marginal tax rate is the rate you pay for the last dollar you earn, which is usually much higher than your effective tax rate. The effective tax rate is calculated by dividing your income into the parts that will be taxed in each applicable tranche. You can reduce your income to another tax bracket through tax deductions, such as canceling charitable donations, property taxes, and mortgage interest. The Tax Cuts and Jobs Act of 2017 lowered the maximum rate in five of the seven tranches.
Additionally, if your income doesn't keep up with inflation, increases in parenthesis make you less likely to pay higher tax rates. It's important to work with a financial advisor who specializes in taxes to develop a financial plan that takes advantage of your tax bracket. With TurboTax, you can be sure that your taxes are done correctly, from simple to complex tax returns, no matter your situation.