For you to be able to file your income tax and any other tax properly, it is important to know what your income tax bracket is, your filing status, and which income tax rates apply to you. When people talk about tax brackets, they are referring to the Marginal Tax Rate – the rate at which their last dollar of taxable income is taxed.
Gross and Taxable Income
Now, it’s also important to know what the difference between Gross and Taxable Income is. This is to know what income you owe taxes on to discover your marginal tax rate.
Gross Income is the total amount of income you get whether in form of money, services, property, and goods that is not exempt from being taxed. Gross is the amount before taking taxes and deductions into account.
Taxable Income is usually significantly lower than the gross income for most people. Taxable income is a segment of your gross income and it will never be higher than your gross income. It’s possible to get the same amount but taxable income will never be higher. It is your gross income minus deductions and exemptions such as charitable donations and retirement account deductions.
To make it simple, gross income is the total amount of income you acquire, not limited to cash, for a single year. Taxable income on the other hand is your gross income less all the deductions and exemptions. That’s the amount of your income on which you will be taxed.
One factor to consider in knowing your tax bracket is your filing status. There are five statuses in which you can qualify: Single, Married, Married filing separately, Head of household, and Qualified Widow(er). Let’s take a look at the definition of each status.
Single – if you are unmarried, divorced, or legally separated until the last day of the tax year, you can qualify to file under the “single” status.
Married – If you are married and would want to file your taxes jointly, you can file your status under Married. When this happens, your income is combined to know what your tax bracket is.
Married Filing Separately – Even if you are already married, you still have an option to file your taxes separately. There would be times that filing a tax jointly is not advantageous or practical for you. If that’s the case, then you can choose this status.
Qualified Widow(er) – if your spouse died in the past tax year and you filed jointly the year before, you can file under Qualified Widow(er) as long as you have at least one dependent.
Now, what is my Tax Bracket?
Once you are done identifying your Gross and Taxable income, and you know what status you filed under, you can then determine what your tax bracket is. This article shows several charts to help you determine your tax bracket and how much you should expect to pay for 2021. Also, it’s important to be aware of possible deductions and exemptions that you can get. This way, you can reduce the amount of your taxable income.
It’s not that easy to understand all the numbers that comes with the tax world. Average taxpayers would normally leave it as it is and pay whatever is being asked from them. Some don’t even have an idea of what is happening to their money. While it’s a bit complicated and tedious, you certainly can sort this out with the help of a tax expert. In that way, you can take advantage of all the possible deductions or other ways to lower your tax. Or better yet, tax resolution professionals can help you maintain your finances in a way that you can easily understand and manage.