One of the most popular questions people ask regarding taxes is, “what tax bracket am I in?” While the question is certainly important and relevant, the more significant question is “what is my marginal tax rate?”
The Difference Between Gross and Taxable
There is a big difference between your gross income and taxable income – something that many people don’t realize. It’s only after you learn to differentiate and discover what income you actually owe taxes on that you can begin to uncover your marginal tax rate. Let’s take a look at each independently before connecting the dots:
- Gross income. According to the IRS, your gross income is the amount of income you receive in the form of money, services, property, and goods that is not exempt from taxation. Underneath the heading of gross income are things like wages, investment gains or losses, business gains or losses, and unemployment compensation. Your gross income from any given year can be found on your income section’s last line on Form 1040.
- Taxable income. For most individuals, the taxable income is significantly lower than the gross income. While it is possible for it to be the same as the gross, it can never be higher. That’s because your taxable income is a segment of your gross income. Also referred to as the taxable portion, it is your total income minus deductions and exemptions. These may include charitable donations, retirement account deductions, and other select investments.
In summary, gross income is the sum of your entire income for a single year. It does not account for deductions. Your taxable income takes your gross income and subtracts all deductions. The final figure is the amount on which you can be taxed.
Choosing How to File
Another major factor playing into which tax bracket you fall in and how much you owe is how you choose to file. The five official filing statuses are Single, Married, Married Filing separately, Head of Household, and Qualified Widow(er).
- Single. If you are unmarried, divorced, or legally separated by the last day of the tax year, you can file under “single.”
- Married. This status is reserved for married couples that plan on filing taxes jointly. In doing this, you combine both incomes to determine the applicable bracket.
- Married Filing Separately. It’s not always practical or advantageous to file together. If you decided to do your taxes separately, this is the filing status to use.
- Head of Household. This filing status is for individuals that are unmarried and have at least one dependent living at home. It’s also possible to file as the head of household if you have at least one dependent and your spouse didn’t live with you for the final six months of the tax year
- Qualified Widow(er). If your spouse died in the past tax year, you filed jointly the year before, and you have at least one dependent, you can file under this status.
Finding Your Tax Bracket
Once you’ve determined your gross income and taxable portion, it’s time to determine your IRS filing status. For 2015 tax rates and brackets you can check out the charts found here. There are also a number of automated calculator tools online that can help you estimate and project which category you may fall under.
As brackets – and not rates – move upward, taxpayers can expect a little bit of relief over previous years. According to George Farrah, the Executive Editor of BNA Tax & Accounting, “The good news is that people whose income is the same compared to last year may enjoy a lower effective tax rate – and a lower tax bill – because of the inflation adjustments.”
For 2015, personal exemptions are expected to be up to $4,000 (from $3,950 this year). It’s also important to note that the personal exemption deduction is now phased out for high-income taxpayers. Standard deduction numbers should look something like this:
- Single — $6,300
- Married Filing Jointly — $12,600
- Married Filing Separately — $6,300
- Head of Household — $9,250
- Surviving Spouse — $12,600
How to Keep More of Your Money
While you hopefully have a slightly better understanding of how to determine – or at least estimate – your tax bracket, it doesn’t mean paying your taxes is easy. Regardless of how much time and effort you put into it, there are always things you’ll overlook or miss on your own. However, with the help of a tax professional, you can ensure you pay the lowest taxes and keep more of your money. Every penny you spend on a tax professional will be returned to you multiple times over.
Keywords: filing status, IRS filing status, lowest taxes