USA – Everything you need to know about income tax. How does income tax work, how to calculate income tax, what are the income tax rates. We answer all your questions, and explain everything from definitions to calculations, examples, etc. Most importantly, we’ve attached a simple way to find out how much income tax you have to pay in one glance.
Income tax can be confusing. What is it, why is it divided so confusingly, how much do I have to pay? Are all things that only make sense once you’ve taken a look behind the curtain to understand what your tax calculator is actually telling you. We’ve compiled this simple guide which helps you learn everything you need about your income tax. Income tax is probably the most important tax, as you pay it when you file capital gains taxes and dividends taxes as well!
Income Tax – Definition and Basics
Income tax means that people or corporations have to pay a certain amount of money to the government based on how much money they make. In other words, income tax is levied on individuals and corporations in return for generating income. This is a form of payment for the government in return for doing business within the jurisdiction, and are typically used to fund public services such as cleaning or education and to pay for goods or welfare which the government offers its citizens.
Tax on individuals and corporations for generating income
How can I Calculate my Income Tax? USA Calculation, Simple Explanation
To calculate your income tax, you first need to find out what your taxable income is. This can differ from your actual income if you have used tax deductions, or paid advance taxes. Once you know what your taxable income is, you must find out the income tax bracket which you belong to. Once you know this, you must calculate that you will pay a part of your income in the first, second, third, etc. tax bracket. If you earn between $86.376 and $164.925, you will pay the firsts $9.950 in the first tax bracket (10%), the next $40.525 in the second tax bracket (12%), etc. until you have counted your whole income.
Find out what your taxable income is
Find your tax rate via the tax bracket
Add up different tax rates until your income is counted fully
Important here are two things, the tax bracket which you belong to, and whether you are filing alone, with a partner, or as head of household. Next, you multiply the tax rate (i.e. the percentage divided by 100) by your total income. Repeat this for the various jurisdictions for which you have to pay income tax (local/municipal, state, federal)
Single
Jointly
Head of household
Explanation – What is an Example of Income Tax?
Let’s take Jane, who works as a secretary for a big company in New York. She makes $50.000 a year, in other words, her income is $50.000. In New York State, there are the following tax brackets:
Tax rate
Single
4,00%
$0–$8.500
4,5%
$8.501–$11,700
5,25%
$11.701–$13.900
5,9%
$13.901–$21.400
6,33%
$21.401–$80.650
The income tax rate for a single person generating $50.000 of income is 6,33%. Yet, she pays 4% income tax on the first $8.500, 4.5% on the next $11.700, etc. To find out how much Jane has to pay, she will have to pay
$8.500 x 0.0400 = 340
$11.700 x 0.0450 = 526.5
$13.900 x 0.0525 = 729,75
At this point Jane will have taxed $34.100, and on the remaining $15.900 she will pay the tax rate of 5,9%
$1.596,25 + ($15.900 x 0,059) = $2.534,35
That means Jane has to pay $2.534,34 to the state of New York. Don’t forget though! New York city also has an income tax, and the federal government also has one. For each of these jurisdictions there is a tax rate which Jane will multiply by her salary to find out how much she has to pay.
What Counts as Income Tax? Types of Taxes using Income
Income tax forms part of multiple forms of taxes. For example, if you buy investment capital, this will typically be taxed under capital gains taxes, but if you have held the capital (e.g. stocks) for less than a year, you do not pay capital gains taxes, but rather income taxes on it. Another example is the dividends tax, where you pay capital gains taxes on dividends, unless they are qualified, at which point you pay the normal income tax rates! Types of taxes to use income tax therefore are
Which IRS Form to use for Income Tax – 1040, 1040A, or 1040EZ
There are three forms to use when filing income taxes. These are the forms 1040, 1040A, and 1040EZ. They are all relevant to income tax, and therefore all apply to all people. You only need to use one though, and must decide which.
The Different Income Tax Forms – Who can use the 1040EZ?
The 1040EZ can be used by everyone who is filing single (or married and filing jointly) and who has an income below $100.000. It is called the EZ because it is simpler than the other forms. With it you do not file for any tax deductions or itemizations.
What is the Difference between Form 1040 and Form 1040-SR?
When paying income tax, the difference between forms 1040 and 1040-SR is that they look different. The additional items, things you file, etc. are all the same, just that the 1040-SR has a different color scheme. It also includes the standard deduction table. The 1040-SR is typically better for people over the age of 65 or with eyesight issues.
Income Tax Structure – Do Rich People Pay more Taxes?
The structure of taxes are often more complicated than imagined, when you really look at it closely. For one, because they differ across regions, and another is that there are so many jurisdictions and small rules to adhere to. Nonetheless, if you want to know the basics of income taxes, this should tell you what you need to know. THis does not differ for e.g. capital gains taxes, where a similar marginal system is applied.
Who Pays more Taxes, Rich or Poor?
In one word, the answer is: the rich. Consider for a moment Jane, who makes $50.000 a year, and compare her to her boss Martin, who makes $200.000 a year. If both of these individuals pay the same tax rate (6.33%), Jane must pay $3.165 in income tax, and Martin has to pay $12.660. Because he makes more money, he has to pay more income tax. On top of that though, the more money you make, the higher the tax rate will be. This relates to tax brackets, and Martin, who makes $200.000, will be in a higher tax bracket than Jane.
Is it Fair that Rich People Pay More Taxes?
At first it may seem unfair that rich people pay more taxes than others. Yet, this is generally accepted because those making more income generally have less troubles financing their lives, while those who are very poor already can often not afford to pay for basic necessities. Therefore, if a Josh, who has troubles paying the electricity bill pays less taxes than a Martin, who just bought himself a new lamborghini, it is generally accepted as fair.
Tax Brackets Meaning and Explanation – What is an Income Tax Bracket?
If you’re looking at taxes it’s impossible to get around this topic. A tax bracket is necessary when different levels of income pay different rates of income tax. This means that a Jane, who makes $50.000 pays a different rate (i.e. percentage) of tax than a Martin making $200.000 and even a Josh who makes $13.000. On top of this, it will matter whether a person is married, and both individuals are filing their taxes together, or whether they are filing them as separate individuals.
Is Tax Bracket the same as Marginal Tax Rate? What is Marginal Tax Rate and Why is it Important
Tax brackets and marginal tax rates are not the same, but related. A tax bracket is when tax rates are divided based on income. A marginal tax rate is the amount of tax you pay for every dollar increase in your income. Therefore, marginal tax rates are always present in a system using tax brackets, and almost always when you have a marginal tax rate, this will be based on dividing earners into tax brackets based on the amount of their income.
Marginal tax rates are important first and foremost because, like tax brackets, they ensure that those unable to contribute more financially (i.e. low-income households) can keep more of the money which they need desperately, while moving this financial load on to people who usually would not struggle with earning slightly less. Marginal tax rates specifically are useful to define exactly how much tax you are paying because of a higher income. This can be important in e.g. promotion negotiations.
Example – New York City Tax Brackets
What are the different income sales tax rates in New York? Take a look below, with the list telling you the income range and what a single person would have as an income tax rate:
$0 – $12.000: 3.078%
$12.001 – $25.000: 3.762%
$25.001 – $50.000: 3.819%
$50.000 + : 3.876%
Interested in New York Taxes? Take a look at our article
What are the Three Types of Tax? Tax Structure, Progressive Taxing, etc.
It is generally accepted that there are three broad types of taxes. This does not mean there are only three forms, but rather that there are three ways in which taxes can be structured. The three types are progressive, proportional, and regressive.
Progressive
Proportional
Regressive
Progressive Tax Rate – Rich People pay more Taxes
A progressive tax is when people who are poorer have a lower tax rate, than those who are richer. In other words, the tax rate progresses with increasing income. In most states, income tax is done this way, meaning that the rich pay a higher percentage of their income.
Progressive – More income = higher tax rate
Proportional Tax Rate – Everyone Pays the Same
Next, the proportional tax rate is when, no matter how much money you make, you pay the same tax rate. In other words, no matter who you are you pay a certain proportion of your taxes. Here, no matter whether you make $10.000.000 or $10.000 a year, you will pay e.g. 6% on income tax.
Proportional – Same tax rate for everyone
Regressive Tax Rate Explanation – How do Regressive Taxes Work?
Lastly, the regressive tax rate, where those making less money have to pay the same taxes as someone with high income. For example a person buying a car, and they have to pay 10% sales tax. For a person with a very low income, this is proportionately much higher than for someone with a very high income
Regressive – lower income = paying more taxes
What are Income Tax Rates in USA? How Much to Pay in Marginal Tax
Every State has their individual income tax rates (except for those who do not have income taxes, see below). At the same time there is a federal income tax rate. Therefore, it is important to keep all in mind when thinking about your income tax payments. So, without further ado, below the breakdown of all income tax rates you could need. Below are the tax brackets for USA federal income tax. First these are for single filers, then for married couples filing jointly. Note the calculation above, which means that the income tax rate corresponding to your bracket cannot simply be multiplied by your income.
USA Federal Income Tax Rates – How Much Income Tax do I Have to Pay? Single
Easily explained – This is what you have to pay in income tax at one glance. These are how much to pay in your marginal tax rate. For singles, the amount you have to pay corresponding to your income is as follows: If you earn
< $9,875 – 10% of taxable income
< $40,125 – $987.50 and 12% of income >$9,875
< $85,525 – $4,617.50 and 22% of income >$40,125
< $163,300 – $14,605.50 and 24% of income > $85,525
< $207,350 – $33,271.50 and 32% of income > $163,300
< $518,400 – $47,367.50 and 35% of income > $207,350
> $518,401 – $156,235 and 37% of income > $518,400
USA Federal Income Tax Rates – How Much Income Tax do I Have to Pay? Filing Jointly
Easily explained – This is what you have to pay in income tax at one glance. These are how much to pay in your marginal tax rate. Filing jointly, the amount you have to pay corresponding to your income is as follows: If you earn
< $19,750 – 10% of taxable income
< $80,250 – $1,975 and 12% of income > $19,750
< $171,050 – $9,235 and 22% of income > $80,250
< $326,600 – $29,211 and 24% of income > $171,050
< $414,700 – $66,543 and 32% of income > $326,600
< $622,050 – $94,735 and 35% of income > $414,700
> $622,051 – $167,307.50 and 37% of income > $622,050
Tax Special! Capital Gains Tax
Capital gains tax is one of the two sisters of dividends taxes. It is a vital tax to know if you want to invest, and plan on increasing value of capital. Capital gains taxes are among the most important for the welathy, and for good reason. Knowing how to use these to your advantage is critical for multiplying your wealth.
Capital gains tax is a tax on the profit you make with investment in capital assets. If you buy stocks and sell them for more money than you bought them, you have made profit (i.e. capital gains), and this extra money that you are receiving is taxed. If you sell capital for more than you bought it, you will necessarily, by law, pay capital gains tax. Although, it is important to distinguish taxes on capital gains and capital gains taxes. The capital gains tax only applies to long-term capital assets (i.e. owned for longer than a year), while short-term capital assets are taxed as if they were normal income, at the income tax rate like the salary you receive from work. Capital gains tax rates are lower than income tax rates!
Dividends tax also utilize capital gains taxes! Although dividends also carry their whole own addition of complications and confusions. We’ve written another helpful and simple guide to learn everything you need to know about dividends taxes, how they work, when they occur, and of course also how to save money on your dividends taxes. No doubt you’re going to learn something very important in this article.
Dividends taxes are taxes on the dividends which you receive as a shareholder in a company. What are dividends? In a sense they are like the company sharing part of their income with you, as a reward and incentive of being a shareholder in their company.
As mentioned, taxes on property are nearly as complicated as on income or capital. Property taxes, where they are taxed, what they tax, and how to pay less property taxes, can all be found in our all-encompassing guide on property taxes.
Property tax is often confused as being a tax on real estate property. Yet this is a misconception. The largest proportion of property taxes come from real estate, because this is the most expensive property most people own. Yet property taxes can also be levied on airplanes, computers, furniture, etc. In the U.S., each person pays an average of $1.617 in property taxes a year. The state which pays the most property taxes is New Hampshire with $3.307.
