What are the main tax brackets?
The federal government adjusts tax brackets annually to account for inflation. You'll typically pay a slightly different amount in taxes every year, even if your income remains the same.
Check out the updated 2024 tax brackets for single filers, married couples, and heads of households. Keep in mind that you're only taxed on your taxable income.
Deductions
Typically, you aren't taxed on 100% of your income. That's because not all your income is taxable. Before you calculate tax payments, you subtract deductions from your taxable income.
Say you earn $85,000 during tax year 2024 and have $10,000 in deductions. Your taxable income shrinks to $75,000. In short, the greater your deduction, the less taxes you'll pay.
Many tax filers opt for the standard deduction. This is automatically calculated based on your income. Some filers will find they save the most by using the standard deduction.
Some tax filers opt for itemized deductions instead. These must be calculated by manually inputting deductions, item by item. Depending on your selections, you may pay less taxes this way than if you opted for the standard deduction. But not everyone will.
Tax credits
Tax credits are like deductions, except you subtract them after calculating tax payments.
It goes like this:
- Calculate income.
- Subtract deductions to get taxable income.
- Calculate your tax payment.
- Subtract tax credits.
Say you owe $11,993 to the federal government. If you have a $2,000 tax credit, subtract the $2,000 credit from your $11,993 tax payment.
$11,993 - $2,000 = $9,993.
You pay only $9,993 in federal income taxes.
The government awards tax credits for all sorts of things. Right now, one of the biggest credits is the EV tax credit, which can be worth as much as $7,500. Tax credits make certain purchases, like electric vehicles, more affordable to the average American.
Other taxes
Federal income tax isn't all you owe during tax season. You may be charged state, local, and property taxes, or taxes related to investing. Some state and local governments use tax brackets to calculate how much taxes you owe.
Often, you'll pay all these taxes when filing taxes during tax season. Exceptions include sales tax, which you pay at checkout, and quarterly taxes paid by self-employed individuals.
Your employer might automatically withhold tax money from your wages if you're employed. If they withhold too much and overpay the government, the government may issue you a refund.
Regardless, you'll still want to submit your tax return come tax season. Without it, you could be liable for financial penalties and won't receive a refund if you're owed one.