Trying to make sense of a new tax bracket isn’t as hard as it seems. Once you understand the IRS tax system, calculating your tax burden becomes a breeze.
An unexpected raise at work bumped you into a higher tax bracket. While it elates you to have more money each paycheck, you also worry about what will happen to your taxes. Understanding how a higher salary affects your tax burden will save you many headaches when it comes time to file.
Here’s what Uncle Sam never told you about a higher income and taxes:
You Will See an Increase in Your Tax Burden
Will you owe more in taxes because you brought home more money? The simple answer is yes, but the increase may not be as bad as you expect. The IRS currently has seven tax brackets, depending on your income.
If you file as a single individual, your rates for 2020 are:
- 10% for incomes of $9,875 or less
- 12% for incomes over $9,875
- 22% for incomes over $40,125
- 24% for incomes over $85,525
- 32% for incomes over $163,300
- 35% for incomes over $207,350
- 37% for incomes over $518,400
While the percentage you owe increases if you make more money, your tax burden will not skyrocket suddenly. That’s because the United States has a marginal rate system. The IRS taxes your income at the lower rates first until you reach the threshold. Think of it as a ladder—you have to climb each rung before making it to the next level.
Claiming Deductions Becomes More Critical than Ever
No one wants to pay the IRS a penny more than required. It’s possible to lower your overall tax burden—and even move into a lower bracket—by taking every deduction possible. You only pay taxes based on your adjusted gross income (AGI). That’s the amount you earn minus any deductions, exemptions, or credits. Let’s pretend you made $86,000 last year. If you have $3,000 in deductions, your AGI would be $83,000. Looking at the chart above, you can see you now qualify for a lower rate.
Of course, you should never claim deductions unless you qualify for them. Fudging your write-offs will increase your risk of an audit, and it’s also illegal. Keep records for every deduction you take. And if you’re unsure what you can claim, let a tax professional guide you through the process.
Updating Your Withholdings May Prevent a Big Tax Bill
Are you comfortable paying a hefty tax bill this year? For most taxpayers, the answer is no. But you can avoid this by submitting an updated W-4 to your employer. It’s a good rule of thumb to reevaluate your withholdings any time your income changes. And if you are self-employed, make sure you pay enough in quarterly taxes.
Don’t Lose Sleep Over Changing Tax Brackets
Tax codes are confusing. And they change each year. The average taxpayer doesn’t have enough time to make sense of them all. Working with a tax professional is the best way to make sure you pay the right amount—and not a penny more—each tax season.
Incompass Tax, Estate & Business Solutions has over 30 years of experience in the tax preparation industry. We’ll help you crunch the numbers and file your taxes the right way. With our team on your side, you never have to worry about any IRS surprises. Get in touch with us to learn how a higher tax bracket will affect your return this year.