Currently there are seven tax brackets ranging from 10% to 37%.
The dollar amounts that define these brackets change depending on varying factors.
These factors include whether or not you are a single filer – or are you married? Filing jointly or separately? Are you the head of your household?
The brackets vary depending on how you file.
You’ll hear me talk quite a bit about marginal tax rate. This is so important because this will determine what tax bracket you’re going to be in.
You’ll have some amount of gross income coming in while simultaneously having deductions taken out: these could be itemized or standard. This will lead you to your adjusted gross income.
Real quick, let’s discuss these two deductions.
Itemized deductions would be childcare expenses, charitable giving, mortgage interest, property taxes, medical expenses, etc.
Standard deduction is a fixed dollar amount each year that you get every year.
Here’s a tip!
If your itemized deductions are higher than your standard deduction, go with the itemized deduction for that year. If your standard deductions are higher, go standard. The catch is, you can only get one of these two deductions.
Something important to note, not all of your money is taxed at the same rate.
Let’s say you make $75,000 a year and you’re single. On the first $9,700 you’re only taxed 10%. Anything from $9,701-$39,475 you’ll be taxed at 12%. On the remaining, you’ll be taxed at 22%.
The top tax bracket you fall into is your marginal tax rate.
So someone with a taxable income of $75,000 has a marginal rate of 22% even though only $35,000 was taxed at that rate.
Although there are seven tax brackets, the percentage of income will fall in each of the income brackets based on how much money you make.
To summarize, your salary doesn’t matter, your gross income doesn’t matter, what matters is your adjusted gross income.
All said and done, that’s how the IRS determines what bucket you go into for audits or any of that fun stuff. It’s all about adjusted gross income!