What Are Tax Rates And How Are They Calculated?
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Taxes are something that many people struggle to understand. But it’s worth knowing which tax bracket you fall under to ensure that you’re being taxed correctly. We pay our taxes to the government (state, local or federal) to ensure they have the funds to maintain our roads, street lights, and parks. The funds are also used to run our emergency services, schools and to protect and provide for vulnerable members of our communities.
To get a handle on how much you’re required to contribute, you’ll need to know your tax rate and how it’s calculated. This can also help you plan financially, as you’ll be able to predict how a career move will affect your tax contributions.
Ahead, we break down exactly what tax rates are and how they’re calculated.
Tax rates are in place to try and make sure that each person pays a fair amount toward the upkeep of their neighborhood and public services. The lower your income, the less tax you’re required to pay, and vice versa. Corporations and businesses are also taxed differently to individuals, sometimes depending on their industry.
The rates are set out into brackets, which include income ranges and a percentage of liable tax for each bracket. The brackets can sometimes shift with inflation and governmental changes. You can easily calculate your personal tax liability using an online calculator.
As with all rules, there are exceptions. Currently, the IRS states that foreign nationals who are students, teachers, professional athletes, or diplomats are exempt from paying taxes. There are also groups required to pay lesser tax rates, depending on their individual circumstances.
There are eight states in the US that do not levy income taxes on their residents: Texas, Washington, Florida, Alaska, Nevada, Tennessee, South Dakota, and Wyoming. These states attract an array of people, including immigrants and retirees, as they can save a considerable amount of money due to the state’s unique tax laws.
Many people look for ways to keep more of what they earn and lower their taxable income. In the United States, there are a number of ways to achieve this. When filing your tax report, you can account for itemized deductions for things such as medical payments and charitable donations, which can lower the amount of tax you owe.
Some vulnerable groups of the population are eligible for a standard tax deduction, which reduces their tax liability further. Your liability can also vary depending on your marriage status, as a married couple’s income will be pooled together and therefore result in less tax being paid than if they filed separately.
Seek Financial Advice
The American tax system can be very complicated, so to ensure you’re filing your tax report correctly and paying what you owe, it’s wise to seek professional advice. Financial consultants and accountants are extremely knowledgeable about the ways to reduce your taxes, and they can also help you file for a refund if you’ve been overpaying.
Shirley Wilson is an entrepreneur and business owner who enjoys sharing her knowledge and experiences with others, from business advice to taxes.