When you are preparing to file your income taxes in 2020 for the 2019 tax year, it is important to be aware of your federal tax bracket. For 2019, there are seven tax brackets, and you may be taxed at different rates for different portions of your income.
The bracket that applies to you depends on the amount of money that you bring in during the year from a variety of sources, including employment, business proceeds, freelance earnings, dividends or rentals.
It also varies based on your filing status, such as whether you are single, married or a head of household.
Note that these are federal income tax rates and may not encompass state taxes that you owe each year, depending on where you live.
Understanding Federal Tax Brackets
In order to understand tax brackets, it is important to keep in mind that not all of the income that you make is taxed at the same rate.
While rates have flattened sharply over time, the U.S. still has a progressive tax system. This means that you pay higher rates of income tax when you have a higher income and a lower rate of income taxes if you have a lower income.
However, high earners do not pay that higher tax rate on their total income. Instead, you will pay an increasing marginal tax rate only on the amount of income that you bring in that is above and beyond the starting point for that bracket.
For example, a person that makes $340,000 in taxes will pay more taxes and at a higher rate than someone who makes $34,000 each year. However, they will pay only the same taxes at the same rate on the first $34,000 of their income, absent any other credits or factors that could affect their taxation.
Essentially, the federal government breaks your income up into pieces, and each segment of your income fits into a tax bracket. You do not pay one rate for your entire federal income tax burden; instead, each chunk is taxed at the appropriate rate. You will always pay taxes at your highest bracket only on the amount of your income above the starting point for that rate.
Of course, this is only for federal income taxes. States may have progressive income taxes of their own, they may have a flat tax or they may have no income tax and rely on sales and other forms of use taxes.
Reducing Your Tax Bracket
There are several ways that people can work to reduce their tax bills even when they are bringing in a larger income.
This does not involve evading taxes or violating the law. Instead, you can use tax credits and deductions offered by the government in order to offset your tax burden or reduce the amount of your income that is taxable.
Remember that your taxable income does not necessarily include every dollar that you bring in; there are a number of different deductions that allow your taxable income rate to more accurately reflect your disposable income.
For 2019, the standard tax deduction is $12,200 for single filers, $18,350 for people filing as head of household and $24,400 for married couples.
For many people, taking the standard deduction is the best way to simplify their taxes, and itemizing their deductions will not produce greater tax savings. This is more likely to be true for people who bring in most of their income through traditional W-2 employment.
Tax deductions can include things like:
- Student loan interests
- Mortgage costs
- Charitable donations
- Much more
In general, you can add up your itemized deductions to see if they are larger or smaller than the standard deduction in order to determine which option is best for you.
Tax Deductions, Tax Credits and Retirement Savings
If you are a business owner or a freelancer, you may need to claim a significant number of tax deductions in order to properly estimate your income.
After all, whether you are freelancing or running a sole proprietorship, you face a number of expenses as a person in business that can significantly offset your income.
Your business expenses are generally tax-deductible, including when you operate your vehicle for your business, advertise or promote your services. All of these can be calculated properly to accurately reflect your taxable income.
Tax credits are another option that can minimize your overall tax burden. Credits, unlike deductions, are subtracted from your tax bill rather than from your income, so they directly reduce the amount of taxes that you owe and can help to boost your refund.
Tax credits address a range of expenses, including tuition, raising children, adoption, retirement savings or changes to your home to boost energy efficiency.
Retirement savings are also important. When you direct funds to a 401(k) in your paycheck, this money goes into your account untaxed. In 2019, you can put up to $19,000 in a 401(k) without paying taxes on that income, an amount that rises to $25,000 if you are 50 or above.
Federal Income Tax Brackets for the 2019 Tax Year
The following tax brackets apply to income earned in 2019, for taxes due in April 2020. Keep in mind that the brackets depend on your filing status: single; married, filing jointly; married, filing separately; and head of household.
- If you are single, your income from $0 to $9,700 is taxed at a 10% rate.
- The same is true if you are married, filing separately.
- The 10% rate applies to heads of household for income from $0 up to $13,850, and married couples, filing jointly, for income from $0 to $19,400.
- If you are single, you will pay 12% on your income from $9,701 to $39,475.
- This is also the case if you are married, filing separately. The 12% rate for heads of household applies to income between $13,851 and $52,850.
- For married couples, filing jointly, it applies to income from $19,401 to $78,950.
- If you are single, this bracket applies to your income from $39,476 to $84,200.
- Once again, the same is true if you are married, filing separately. The 22% rate for heads of household applies to income between $52,851 and $84,200; this is where head of household rates begin to converge with single people.
- For married couples, filing jointly, it applies to income between $78,951 and $168,400.
- If you are single or married filing separately, this bracket applies to your income from $84,201 to $160,725.
- If you are a head of household, the 24% rate applies to income between $84,201 and $160,700.
- If you are married, filing jointly, it applies to income between $168,401 and $321,450.
- If you are single or married filing separately, this bracket applies to income between $160,726 and $204,100.
- If you are a head of household, this bracket applies to income between $160,701 and $204,100.
- If you are married, filing jointly, it applies to income between $321,451 and $408,200.
- If you are single or a head of household, this bracket applies to income between $204,101 and $510,300.
- If you are married, filing separately, it applies to income between $204,101 and $306,175.
- If you are a married couple filing jointly, it applies to income between $408,201 and $612,350.
- This highest tax bracket applies to income of $510,301 or higher for single people or heads of household.
- It applies to income of $306,176 or higher for married people filing separately or $612,351 for married couples filing jointly.
Tax brackets can be complicated for many. If you want to add ease to filing your taxes, check out Picnic Tax. We connect you with qualified online accountants to prepare your taxes and maximize your savings, whether you are an employee, a freelancer or a business owner and investor. You pay a flat rate, so there are no surprises or unexpected expenses. Contact us today to find out more about how we can help you.