The U.S. tax system uses brackets where each chunk of income gets taxed at a higher rate, not your whole income at one rate. A single person earning $70,000 pays about $10,448 in federal tax across the 10%, 12%, and 22% brackets. You can lower what you owe by maxing out retirement contributions, claiming deductions, or using credits like the Child Tax Credit.
Everyone falls into a tax bracket. So what exactly does that mean and how does it apply to you? Let's break it down so you understand exactly how tax brackets work and more importantly, how they affect your wallet. First things first, what even is a tax bracket? In the US, we have a progressive tax system, which means the more you make, the higher the percentage of your income gets taxed. But, and this is important, you're not taxed one flat rate. Instead, your income is divided into chunks and each chunk is taxed at a different rate. For example, let's say you make $50,000 a year. You don't just get taxed at one single rate for all of it. Instead, part of your income is taxed at 10%, another part at 12%, and so on. So when you hear someone say, I'm in the 22% tax bracket, that doesn't mean all their income is being taxed at 22%, just the portion that falls into that bracket. Let's go over the current tax brackets for 2024. Keep in mind, these apply to taxable income. So after deductions and adjustments. This is what the brackets will look like for single filers. We start out with a 10% tax on income up to $11,600. Then the number grows to 37% tax on income over $609,350. And this is what the brackets look like for married couples filing jointly. We start with a 10% tax on income up to $23,200. And in this situation, the 37% tax would be on income over $731,200. Let's go through a quick example. Say you're a single filer making $70,000 a year. Here's how your taxes break down. The first $11,600 is taxed at 10%, which equals $1,160. The amount from $11,601 to $47,150 is taxed at 12%, so $4,266. The amount from $47,151 to $70,000 is taxed at 22%, Which equals $5,022. So in total, you'd owe about $10,448 in federal income tax, not 22% of $70,000, which would be way higher. Understanding this can save you a lot of stress and confusion during tax season, and maybe even save you some money. Now that you get how tax brackets work, let's talk about ways you can lower your taxable income. Max out deductions. Things like retirement contributions, 401, IRA, student loan interest, and business expenses. Use tax credits. These directly reduce the tax you owe, like the Child Tax Credit or Earned Income Tax Credit. Consider filing strategies. If you're married, you might want to see whether filing jointly or separately works better for your situation. Hopefully this gave you a clear understanding and made taxes a little less painful. If you have any questions, leave them in the comments. If you found this helpful, go like and subscribe. And remember, the IRS sucks.
