Income tax is imposed on the taxable income of individuals, corporations, trusts, and estates by the federal, state, and local governments. This tax is calculated by multiplying the taxable income by a specified tax rate. Federal and state income taxes differ with respect to tax rates and how they are applied. These jurisdictions also have different definitions of taxable income and the tax credits and deductions they allow. With knowledge of all the relevant variables, you can figure out how much your income taxes are.
Progressive Income Tax System
The income tax you owe in the United States depends on several factors, key among them being the total amount of money you make. This progressive income tax system means that higher tax rates are applied on higher income levels, and the tax burden is shifted away from those who have less.
Tax rates are also not applied to the total taxable income. Instead, marginal tax rates are applied to the portions of income within the specified tax bracket. This means that the taxable income is divided into portions, and each portion is taxed at a different rate. These tax brackets are adjusted annually for inflation. Seven marginal tax brackets are currently specified at the federal level. These are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Local, State, And Territorial Income Taxes
Many U.S. states and localities levy taxes on the income of their residents. These taxes are deductible for federal tax purposes. States that impose income taxes use either progressive or flat income tax systems. A flat tax system applies a single tax rate to all income levels. Many states implementing the progressive tax system use marginal tax brackets different from the federal tax code. They have income tax rates that vary from 1% to 16%.
States and localities define taxable income differently. Some use a second measure of capital or income as a basis for imposing additional or alternative taxes.
Calculating Income Tax
Income tax is calculated by first determining the taxable income, which is gross income less deductions and exemptions. Gross income is defined as total income from all sources. The income can be in the form of money, property, or services.
Taxable income is then divided into income brackets, and taxation for each bracket is calculated by multiplying the amount in the bracket with the respective tax rate. The taxes are added up to give the total income tax.
If you have accurate information about your income, deductions, and tax credits, you should be able to calculate your tax balance. The tax balance can be the income tax you owe or the tax refund you're owed.
Final Thoughts On Income Tax Calculations
You are required to calculate your income tax and file returns each year. It is the job of taxing authorities to review and adjust these returns. Most people have little understanding of how chunks of their income disappear toward their tax liability. They wait for a tax preparation software or accountant to tell them whether they owe money or deserve an IRS refund.
With a basic understanding of the tax brackets and how income taxes are calculated, you can figure out how much your income taxes are and how you can make better financial decisions to relieve your tax burden. It is time to figure out your fiscal finances!