newsprompt.co
TAX DEDUCTIBLE DONATIONS
Income in America is taxed by the federal government, most states governments and many local governments. The federal income tax system is progressive, so the rate of taxation increases as income increases. Marginal tax rates range from 10% to 39.6%.
The Federal Income Tax
The federal personal income tax that is administered by the Internal Revenue Service (IRS) is the largest source of revenue for the U.S. federal government. Nearly all working Americans are required to file a tax return with the IRS each year and most pay taxes throughout the year in the form of payroll taxes that are withheld from their paychecks.
Income taxes in the U.S. are calculated based on tax rates that range from 10% to 39.6%. Taxpayers can lower their tax burden and the amount of taxes they owe by claiming exemptions, deductions and credits. Below, we’ll take a closer look at the most important IRS tax rules to help you understand how your taxes are calculated.
Calculating Income Tax Rate
The United States has a progressive income tax. This means there are higher tax rates for higher income levels. These are called “marginal tax rates” – they do not apply to total income, but only to the income within a specific range.
These ranges are called brackets. Income falling within a specific bracket is taxed at the rate for that bracket. The table below shows the tax brackets for the federal income tax.
You’ll note that the brackets vary depending on whether you are single, married or the head of household. These different categories are called filing statuses. Married persons can choose to file separately or jointly. While it often makes sense to file jointly, filing separately may be the better choice in certain situations.
Based on the rates in the table above, a single filer with an income of $50,000 would have a top marginal tax rate of 25%.
However, that taxpayer would not pay that rate on all $50,000. The rate on the first $9,225 of taxable income would be 10%, on the next $28,225 would be 15% and on the remaining $12,550 would be 25%. This is because marginal tax rates only apply to income that falls within that specific bracket.
Calculating Taxable Income Using Exemptions and Deductions
Federal tax rates apply to taxable income. This is different than your total income (also called gross income). Taxable income is always lower than gross income.
To calculate taxable income, you begin by making certain adjustments from gross income to arrive at adjusted gross income (AGI). Possible adjustments include subtractions for student loan interest payments,contributions to an IRA, moving expenses and health-insurance contributions for self-employed persons.
Once you have calculated adjusted gross income, you can subtract exemptions and deductions (either itemized or standard) to arrive at taxable income. For the 2015 tax year, the exemption is equal to $4,000.
Exemptions can be claimed for each taxpayer as well as dependents such as a spouse and children. For each exemption claimed, you can subtract $4,000 from your taxable income.
Deductions are somewhat more complicated. Many taxpayers claim the standard deduction, which varies depending on filing status, as shown in the table below.
Filing Status Standard Deduction Amount Single Filers$6,300Married, Filing Jointly$12,600Married, Filing Separately$6,300Head of Household$9,250Some taxpayers, however, may choose to itemize their deductions. This means subtracting certain eligible expenses and expenditures. The most common itemized deductions include:
-
Deduction for state and local taxes paid. Taxpayers can deduct the entirety of any state and local taxes (including income, property and generalized sales taxes) that they paid for that tax year.
-
Deduction for mortgage interest paid. Interest paid on the mortgages on up to two homes, and a total of $1,000,000 in debt can be subtracted.
-
Deduction for charitable contributions.
-
Deduction for medical expenses that exceed 10% of AGI.
How to Calculate Federal Tax Credits
Unlike adjustments, exemptions and deductions, which apply to your income, tax credits apply to your tax liability (which means the amount of tax that you owe).
For example, if you calculate that you have tax liability of $1,000 (based on your taxable income and your tax bracket) and you are eligible for a tax credit of $200,that would reduce your liability to $800. You would only owe $800.
Tax credits are only awarded in certain circumstances, however. Some credits are refundable, which means you can receive payment for them even if you don’t owe any income tax. The list below describes the most common federal income tax credits.
Calculating Your Tax Refund
Whether or not you get a tax refund depends on the amount of taxes you paid during the year (because they were withheld from your paycheck), your tax liability and whether or not you received any refundable tax credits.
When you file your tax return, if the amount of taxes you owe (your tax liability) is less than the amount that was withheld from your paycheck during the course of the year, you will receive a refund for the difference. This is the most common reason people receive a tax refund.
State and Local Income Taxes
Many states as well as some cities and counties have their own income tax, which is collected in addition to the federal income tax. States that do have a state income tax require that you file a separate state tax return and have their own rules. If you are curious about a particular state’s tax system and rules, visit one of our state tax pages.
