To say the United States tax code is “confusing” is an understatement. Every citizen begrudgingly pays taxes, but millions of Americans become confused when calculating their tax rates every year. That’s because many factors go into determining which rate they’re supposed to pay, and sometimes even how much they’re supposed to pay per share of their income.
To avoid the costly scenario in which you pay the wrong amount in taxes and the Internal Revenue Service (IRS) conducts an audit, it’s best to get your questions answered by a tax expert in advance. Here are some of the basics on what goes into taxes to help you determine how much you might have to pay in 2020.
Why We Pay Taxes
We pay taxes because the federal government requires us to pay them. In some instances, state and local governments require citizens to pay taxes, too. The tax revenue collected by each level of government pays for community services, like helping make sure the roads you drive on are well maintained, the parks you visit and properly manicured, and the police and fire departments have adequate funding.
When you receive a paycheck, you do not get all of the money you earned. You receive a post-tax sum. You will see line items like Social Security and Medicare, which are taxes the federal government is taking out of your check in advance that you will benefit from later in life — typically during retirement. This can help make sure your contribution amount matches what you owe based on your tax bracket.
What are the Tax Brackets for 2020?
This is where things get confusing if they haven’t been already. The U.S. has seven tax brackets for 2020, but even that manages to become more convoluted because we use marginal tax rates — and some of your income tax could be taxed at different amounts.
Tax brackets are broken down by your filing status. Each of these comes with slightly different taxable income brackets.
Married Filing Jointly
Married couples filing a joint tax return will fall under this bracket. The dollar figures below represent the total combined income for the couple.
- 10% – up to $19,750
- 12% – between $19,750 and $80,250
- 22% – between $80,250 and $171,050
- 24% – between $171,050 and $326,600
- 32% – between $326,600 and $414,700
- 35% – between $414,700 and $622,050
- 37% – over $622,050
Married Filing Separately
Married couples may choose to file their taxes separately. In this instance, each member of the couple looks at their individual income to determine their tax bracket.
- 10% – up to $9875
- 12% – between $9875 and $40,125
- 22% – between $40,125 and $85,525
- 24% – between $85,525 and $163,300
- 32% – between $163,300 and $207,350
- 35% – between $207,350 and $311,025
- 37% – over $311,025
Heads of Households
A head of household filing is reserved for certain situations. To qualify under this bracket, you must be unmarried and have paid more than half the cost of keeping up a home for the tax year as a single taxpayer.
- 10% – up to $14,100
- 12% – between $14,100 and $53,700
- 22% – between $53,700 and $85,500
- 24% – between $85,500 and $163,300
- 32% – between $163,300 and $207,350
- 35% – between $207,350 and $518,400
- 37% – over $518,400
Single Filers
Unmarried individuals who do not fall into any other tax bracket file as single filers. You will see similarities between this bracket and both the married filing separately and the head of household options.
- 10% – up to $9875
- 12% – between $9875 and $40,125
- 22% – between $40,125 and $85,525
- 24% – between $85,525 and $163,300
- 32% – between $163,300 and $207,350
- 35% – between $207,350 and $518,400
- 37% – over $518,400
Standard Deduction
While not a tax bracket, the IRS provides a standard deduction each year that any filer can use on their taxes. Some people prefer to itemize their deductions to get an exact amount, but this requires extra work and detailed information.
For 2020, the IRS has the following standard deductions:
- Single – $12,400
- Head of Household – $18,650
- Married Filing Jointly – $24,800
Understandable Confusion
To muddy the waters even more, because we use marginal tax rates, you could pay taxes at several different rates. For example, if you are a single person making $100,000 in 2020, your federal tax return would allocate your tax credits as follows:
- You owe 10% for the first $9875 of your annual income
- You owe 12% for the amount of your annual income between $9875 and $40,125
- Then you owe 22% for the amount between $40,125 and $85,525
- Finally, you owe 24% on the amount between $85,525 and $100,000
Many tax filers thus get understandably confused during tax season every year. The American tax system is not easy to understand, which is why you can benefit from working with a trusted tax advisor.
While you may know you are better off taking the standard deduction, there may be other deductions you qualify for but you do not know about. This could further reduce your tax liability and your income tax rates, saving you money.
Work with a Trusted Tax Advisor
A trusted tax advisor will look out for your best personal finance interests, help you discover new deductions, and make sure that your tax credits reflect the amount you need to pay — and not a penny more. At Silver Tax Group, our goal is to help individuals and families understand the income tax system, their total taxable income, and what tax rate you need to pay. We do this by examining your financial information for the year and work to maximize your deductions to lower your overall tax burden.
Contact Silver Tax Group today to discuss your 2020 tax bracket questions, or to speak with an expert about other tax-related questions and concerns. We are always available, even during the COVID-19 pandemic.
