Understanding The Taxes You Pay

1.png

Tax filing season has begun! While many of you are filled with excitement and making plans on how your refund is going to be spent, it will benefit you to understand the taxes that you pay. If you are one of those lucky individuals that consistently receive a huge refund every year,  you are paying a lot of money in taxes, probably more than you realize.

Income tax is the portion of your earnings that are handed over to Uncle Sam. The rate you pay depends on your taxable income (what's left after you subtract tax breaks and make some arcane adjustments). Very few people know just how much they pay in taxes each year.

When it comes to taxes, not all income is treated equally. However, you pay less tax on your first dollars of earnings and more tax on your last dollars of earnings.

For example, (using the chart below) if you're single and your taxable income totals $45,000 during 2017, you pay federal tax at the rate of 10% on your first $9,325 of taxable income, 15% on income between $9,325 and $37,950 and 25% on income from $37,950 to $91,900.

2017TaxBrackets.png

 

 

 

Your marginal tax rate is the rate you pay on your last or "highest" dollars of income. So in the example above, that individual's federal marginal tax rate is 25%. In other words he/she effectively pays 25% federal tax on her last dollars of income (those dollars in excess of $37,950).

 

Some states pay state income taxes in addition to federal income taxes. Your total marginal rate includes your federal and state income taxes.

The tax system is very complicated but it's beneficial that you at least understand your marginal tax rate. It allows you to calculate the additional taxes you’d have to pay on additional income.

 

 

 

FinanceLaurie Nicolas