Posted by Abundant Wealth Planning LLC

How to Estimate Your Tax Bracket

How to Estimate Your Tax Bracket

Getting your taxable income is not a straightforward process. You have to sum all your income from various sources and remove your allowable deductions. For people that want to avoid the hard work, there are online programs that can help

Taxpayers should not forget that the advent of the Tax Cuts and Jobs Act of 2017 increased the standard deduction to $12,000 for single filers and $24,000 for couples filing jointly. 

Tax Brackets and the Tax Cuts and Jobs Act of 2017

While the 2007 TCJA did not include any new bracket, there was an adjustment to some percentage in the seven brackets. 

The changes that stood out was the reduction of the marginal tax rate in three of the four lowest tax brackets by one to four percent. Almost all taxpayers also had their standard deduction nearly doubled.   

This led to tax inflation adjustment from the IRS as the standard deduction rose to $12,400 for single filers and married filing separately. With this, married couples that are joint filers can deduct $24,000 as well as a surviving spouse. Heads of households also get a deduction of $18,650.

How to Calculate Your Tax Bracket

To determine your tax bracket, your filing status and taxable income will be a great guide. Here are five different filing statuses: 

  • Single Filing: divorced, unmarried people and legally separated falls here

  • Married Filing Jointly: a legally married couple agrees to sum their income and remove all allowable expenses

  • Married Filing separately: to reduce each individual's income, the married couples filing separately.

  • Head of Household: Single, unmarried people responsible for over half of the running cost of a house. This is in addition to the presence of a qualifying person living with you for over six months. 

  • Qualifying Widow(er): There is the provision for joint filing for a widow(er) the year of the spouse’s death. 

Calculating Taxable Income

Your gross income is the starting point of your taxable income. Your gross income is a sum of income from all jobs, including investment income, business, or retirement.

The next step is to calculate the adjusted gross income (AGI). This allows you to have adjustments before applying deductions. Examples are student loan interest, tuition fees, paid alimony, moving expenses, contribution to your IRA, etc. You will remove these expenses from your gross income to give you your AGI.

Deduction comes next

For the deduction, it can either be itemizing or standard deduction. Anyone can use the standard deduction. If you, however, believe that your allowable deduction will be more than the standard deduction, itemizing will be best for you. Charitable contributions, mortgage interest, medical expenses, and student loan interest are examples of allowable deductions.

For 2021, here are the standard deductions:

  • Single filers: $12,400

  • Married filing jointly: $24,800

  • Married filing separately: $12,400

  • Heads of households: $18,650

This leads you to your taxable income. However, deducing what you owe as taxes is not simple mathematics, where you multiply your tax rate by a number.

Tax Brackets and How it Works 

In an ideal world, a person whose total earnings in a year is $50,000 will have to pay tax by multiplying the entire income ($50,000) by the tax bracket (22%). The calculation will give $11,000 as tax for the year.

Sadly, however, this is not an ideal world. This is the United States of America, where you need to be a professional to understand all the mumbo jumbos of the tax code. There is something known as the marginal rates that the U.S. system uses.

Marginal Tax Rates

This is the rate you pay at every income level. As your income rises, there will be different tax rates, and it increases with each level. The implication of this is the presence of various tax rates that can be used to calculate what you owe the IRS.

Effective Tax Rates

This is the actual percentage of your taxable income that belongs to the IRS. In calculating this, divide the sum of your paid tax by your taxable income. This rate should be very small, way lower than the rate from your tax bracket.

Putting It All Together: Calculating Your Tax Bill

The lowest bracket is your starting point to calculate your tax obligation. For the next bracket, repeat this step and continue till you get to your bracket. The summation of each tax from your bracket will give your total tax bracket.



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