The U.S. utilizes a progressive system of income tax in which individuals are taxed different amounts on each portion of their yearly income. It’s a confusing system that leaves taxpayers reeling. There are multiple tax brackets and each one is assigned a tax rate percentage. A person’s yearly income determines their tax rate.
Tax Brackets
When individuals file their annual taxes at the end of 2021, they’ll find 7 different tax brackets.
- 10 percent for $0 to $9,950
- 12 percent for $9,951 to $40,525
- 22 percent for $40, 526 to $86,375
- 24 percent for $88,376 to $164,925
- 32 percent for $164,926 to $209,425
- 35 percent for $209,426 to $523,600
- 37 percent for $523,601 ad over
The number of deductions claimed on federal income tax reduces the amount of taxable income. The more deductions an individual has, the less of their income will be taxed at a higher rate. There are a number of deductions that individuals can claim on their federal income tax to reduce their tax burden.
There are also dollar-for-dollar tax credits that can reduce the actual tax bill. Tax credits typically produce a better result than deductions. That doesn’t mean individuals will receive the difference in the form of a refund, just that they will have less to pay taxes on.
People can itemize deductions, but there are some types of itemizations that have limits on the dollar amount that can be claimed. However, deductions reduce the amount of taxable income, and thereby the amount of taxes to be paid. A number of life events, such as having a child, may qualify individuals for additional deductions and credits that reduce their tax liability.
Many individuals purchase income tax software or use an online tax service to do their taxes and those methods are acceptable for people with simple taxes to calculate. For those making $200,000 or more or who own a business, a tax accountant is a better option. The professionals are experts at finding legal ways to reduce tax burdens and the amount of taxes their clients have to pay.
At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs. We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!