December 18, 2020

How Do Tax Brackets Actually Work?

How Do Tax Brackets Actually Work? there are a few topics that are consideredoff-limits at my family’s Thanksgiving table, and one of them is TAXES, or more specifically,the American tax SYSTEM..

Virtually everyone has a strong opinion aboutit: It’s unfair! It doesn’t go far enough! It’s too complicated! Cable, news and social media are filled withpassionate debates about it, but how many people actually know how our current tax systemworks? If your eyes glaze over when you hear phraseslike “progressive taxation” and “marginal brackets,” you’re. Not alone. Even some of our law-makers seem to have ashaky grip on the concept. But if you. Hope to have a say in a systemthat impacts your wallet every day, you should understand how—and why—it ended up thisway. Let’s, start with something all of us. Canagree on. The U.S. tax code is complicated. Really complicated. It’s one of the most complicated, systemsin the world, taking the average citizen 13 hours to file each year. Compare that to, say, Japan, where it’scloser to 15, minutes. And one reason we have such a confusing systemis because our income is taxed at different rates, depending on how much we earn. For nearly 100 years, our country had no incometax. The first one was, levied in 1861 during thecivil war.

At a flat 3% tax on income over $800.The next year, in 1862, the first “progressivetax bracket” appeared, with the 3% rate AND a 5% rate for any income earned over $10,000. Then in 1872,, the income tax was repealedbecause — get this — the government no longer. Needed the money. Can you even imagine…? Then in 1913 with the 16th Amendment, progressivetaxes. Made a permanent come-back. It gave the Federal government the free reignto tax workers’, income in every state. So what is a “progressive tax”? Well, you can think of tax systems comingin one of three main flavors. Regressive, Proportional, or Progressive. A regressive tax impacts lower paid workersmore severely..

Paying sales tax on groceries or clothingwill end up being a higher portion of a low-earner’s. Pay check than a high-earner. A worker earning $20,000 a year who pays $1,000in sales tax will.

Be parting with 5% of his income. Another making $100,000 paying that same taxfor the same goods will only be.

Charged 1% of her income for the same thing. A simpler solution would be a proportionaltax, where, simply put, everybody pays the same percentage, of their income, no matterhow much they, make. Nine states currently impose a proportional, flat state income tax. That means no matter how much you make, yourtax rate stays the same. For example, 5% of every dollar earned. Finally, there’s the progressive tax, a systemthat has a heavier impact on high earners. Low earners may end. Up paying little or nothing,with only the wealthiest people paying the highest tax rates., How does this actually work? Through a series of different tax levels or“marginal tax brackets”. Buckle up, it’s about to get exciting! Let’s say you’re a single, person making$60,000/yr. A quick look at the IRS Tax Brackets willtell you that you fall into the 22% bracket. Do you have to give the.

Government 22% ofyour income? No! A common misconception is that entering ahigher tax bracket means your. Whole income is taxed at the higher rate. So how much are you, actually paying? After taking your available deductions, you’releft with $47,800 in “Taxable income”. As of 2019 we, have 7 marginal tax bracketsbetween 10 and 37%. Each bracket along the way applies to onespecific chunk of your income, not. The whole thing. Bracket 1 is for your first $9,525, and itgets taxed at 10%. Next stop is Bracket 2. This applies to $29,175, and, is taxed at arate of 12%. Last stop is Bracket 3, where your remainingincome, of $9,100 will be taxed at 22%. Even though you’re in the 22% tax bracket,your “effective tax rate” is only 10%, thanks to the marginal rates. In our progressivetax system. So a single-filer with a taxable income of$500,001, may be in the highest tax-bracket of 37%, but only $1.00 is taxed at that rate. The effective rate will be much, lower. This system is definitely more complicatedthan a flat-tax. But is it fair? Simply put; no. A progressive tax system, by definition isunfair. It allows lower earners to pay.

Very littletax… In fact more than 44% of Americans, pay nofederal income taxes. And the more money you make, the less of ityou will keep. Opponents of progressive taxation tend tobe higher earners, arguing that the system “punishes” wealthy people, and activelydiscourages making. A higher income. They claim that a flat-tax would be simpler,easier, and more fair. Supporters of a progressive tax, however,point to the real-world human impact. On struggling families and low wage earners. They argue that if people have a greater abilityto pay, then they, should pay more., And a progressive tax system, they claim,can counteract the regressive nature of sales taxes, easing the impact of taxes on yourrent or groceries, while hitting you harder in your ability to take vacations or, buy luxurygoods. And while nobody loves paying taxes, the averageUS tax-payer actually pays less than almost any other.

Developed nation. Compared to, say Belgium, we get off.

Prettyeasy. Their lowest tax-bracket is 25%, and the highestis 50% for anything over 38,080 Euros! Do you feel our progressive tax-system encourageslaziness? Does it discourage people from earning moremoney? Or is it giving a leg-up to. People with lowersalaries? Whatever your opinion, now that you understandthe mechanics of marginal brackets and progressive.

Taxation, you’ll be in a much better placeto argue about it over your next Thanksgiving dinner. Or in the comments section. And that’s our two cents!.

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