Money Matters: How do tax brackets work?
COLUMBIA, S.C. (WIS) - How do tax brackets work?
The US system works on a marginal rate, which means we are taxed in stages, so only your top-end income is taxed at the top-end rate.
For example, people get a standard deduction which means a portion of their income is completely tax-free. For single individuals, that’s $13,000 per year and for couples, that’s upwards of $26,000 per year.
If you have a couple making $60,000 a year, they have more of their money being tax-free than actually being taxed at the 12 percent tax bracket.
A common misconception of tax brackets is, hearing about getting all itemizations and deductions you can. Josh Bradley, with Capital City Financial, says with the standard deduction being as high as it is, those deductions do nothing for you.
Especially if you’re holding on to things like a mortgage, where you’re paying interest to get a deduction when you know you don’t get it anyways, that can be a bad decision for a lot of people.
Another misconception is that bonuses are taxed at a higher rate. The government does require that businesses withhold at a higher rate, but bonuses are taxed just the same as regular income.
The last thing is that your goal should be to get into the lowest tax bracket possible. While it’s nice to get as many deductions and savings as possible, the focus shouldn’t just be on this year, it should look out to the future because some of those savings may cost in the future.
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