Your federal tax bill may be lower this year, and here’s why.
Changes in the tax code mean that more of your income is taxed at lower rates.
A beaker can help us see how this works. The lines mark the tax rates.
The spaces between the lines are the tax brackets; they show the range of income taxed at each rate.
As your income moves up, only the portion that falls within the next bracket is taxed at the higher rate, and your final tax bill is a blend of the different rates.
Let’s look at an example with a married couple filing jointly.
Together they make $189,000, but, that number is reduced by their deductions.
They can take either the standard deduction or they can itemize, and subtract whichever is greater.
We’ll use the standard deduction for a taxable income of $165,000. As we pour those taxable dollars into the beaker, they cover the first, second and third brackets.
While 22% is the highest rate they pay, it doesn’t apply to all of their income.
When we add up the taxes due from each bracket, their total is $28, 179. And when we divide the tax they owe by their total income, we get their effective tax rate of 14.9%. And that’s the rate that really matters.
Consult your tax or financial planning professional to see how changes to the new tax law may impact your personal situation.
For more tips on managing your taxes efficiently, watch the other videos in this series, or, visit the tax strategies page at Insights & Ideas.