Tax category or tax class (tax bracket) is one of the most difficult to understand aspects of the tax system. But the ignorance of your category and how it works, can seriously harm you as a taxpayer. To understand this issue offers USA Today.
“For the last three days two people have asked me a question: “is it True that, earning $ 100 more, I will go to the next tax bracket and will pay thousands of additional dollars in taxes?”, says Chris Mulvaney, tax Director, CBIZ MHM. — There is a misconception that your entire income will be taxed in the top category.”
As shown by this question, many people find that their maximum tax rate reflects the percentage that they will pay in taxes from all his income. In other words, a single taxpayer with annual income of $ 100,000 may mistakenly believe that his maximum rate of 24% applies to every dollar he earns.
Classes but taxation doesn’t work like that. Instead, employees will pay 10% of your first income of 9700 dollars, then 12% of income over 9700 dollars; 22% on income above 39 $ 470; 24% falls to the share of income above 84 $ 200.
What is your actual tax rate?
In a nutshell, your maximum bid reflects what you will pay from the part of income that falls in this upper segment, but your effective rate — or what you actually pay the IRS — is likely to be much lower due to the layered structure of this system.
“Thanks to the tax reform 2018 there are 7 levels that you go through as you increase your taxable income, says Dina Piron, head of the global EY offices TaxChat, services, tax preparation services from Ernst & Young. — Your actual tax rate will be in the middle category and, as a rule, much below your maximum maximum bid”.
The problem, according to Piron, is that the wrong understanding of how classes work taxation can lead to an incorrect assessment of your tax situation. For example, if you believe that you will pay the maximum marginal rate on your whole income, you may be overpaying taxes during the year.
“Some people are really happy to receive a large tax refund, but I believe that it means you lost money during the year,” says Piron.
Myths about tax refund
Returns — another issue of taxation, which is wrong to see the taxpayers. Only half of Americans understand that a refund is money that they already paid (survey data Credit Karma Tax). Many believe that the compensation is paid by the government, not their own money.
The problem is that the IRS does not pay interest on money overpaid Americans: the return means only that the people provide to the government an interest-free loan.
To determine the effective tax rate, you divide your total tax on your taxable income. The law about jobs and tax cuts created a new tax category, along with many other changes that came into force in 2018. This means that you may want to check its profit for the 2018 or data from this year to get an idea of your most current effective tax rate.
It is also important to understand that the IRS usually makes changes in the tax category every year to adjust for changes in accordance with changes in the cost of living. For example, in November the IRS released new tax classes for the year 2020 that will affect your current income. However, your tax return is 15 April of this year will depend on tax categories, 2019.
The scope of the categories has widened a bit, while the lowest rate of 10% currently applies to income up to 9875 dollars for single applicants and 19 $ 750 for married couples filing a Declaration together. In 2019, these limits was $ 9700 dollars for single persons and 19 $ 400 for married couples filing a Declaration together.