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Money Matters: How do tax brackets work?

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Published: Jun. 21, 2022 at 1:08 PM EDT
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COLUMBIA, S.C. (WIS) - How do tax brackets work?

Josh Bradley with Capital City Financial says 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 rate that your bracket is in.

For example, people get a standard deduction which means that a portion of their income is completely tax-free. For single individuals, that’s $13,000 a year and for joint couples, that’s upwards of $26,000 a year.

If you have a couple making $60,000 a year, they actually have more of their money being tax-free than actually being taxed at their 12 percent tax bracket rate.

What are some common misconceptions about tax brackets?

A lot of time people think they should get every itemization or deduction they can. However for a lot of people, the deductions do nothing for you due to the standard deduction being high. Especially if you are holding on to things like a mortgage where you’re paying interest, getting a deduction could be a bad decision.

Another misconception is that bonuses are taxed at a higher rate. The government does require businesses to hold at a higher rate, but bonuses are taxed just the same as regular income.

Bradley says people think their 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 be solely on this year but the future as well.

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