Everyone who earns income is required to file an income tax return. Even if you owe no taxes, you must file a return. Failure to do so will result in fines and penalties. When you get your paycheck, an estimate of the taxes you owe has already been taken out. Your tax return calculates the exact amount you owe. If not enough has been deducted from your paycheck, you pay the remainder of what you owe when you file your return. If you have had too much deducted from your paycheck, the IRS will refund the difference.
The IRS offers every taxpayer a standard deduction that reduces the amount of taxable income. You have a choice to either take this standard deduction or itemize your own deductions. Deductions include the interest paid on mortgages, contributions to a tax-deferred retirement plan, contributions to charity, and a certain amount of medical expenses, to name a few. You should itemize your deductions if they’re greater than the standard deduction. Generally, if you don’t own your own home, you’re better off taking the standard deduction. In addition, completing the tax return is much easier when you take the standard deduction.
Personal Income Tax Rates Filing as Single 2016
If Your Taxable Income Is at Least . . . | But Not More Than . . . | Your Highest Tax Rate Is . . . |
---|---|---|
$ 0 | $ 9,275 | 10% |
$ 9,275 | $ 37,650 | 15% |
$ 37,650 | $ 91,150 | 25% |
$ 91,150 | $190,150 | 28% |
$190,150 | $413,350 | 33% |
$413,350 | $415,050 | 35% |
$415,050 | No limit | 39.6% |
Source: Data from “Federal Tax Brackets,” www.moneychimp.com/features/tax_brackets.htm. © Mary Anne Poatsy
Table M5.4 summarizes the U.S. income tax rates single people paid in 2016. Income taxes are computed on a marginal tax rate. This means that tax rates progressively increase as your income increases, and the higher tax rate applies to only the income you earned in the higher tax-bracket range. So, for example, if you earned $9,300 in 2016, as shows, you would have paid a tax rate of 10 percent on $9,275 of it and a 15 percent tax rate on the remaining $25 you earned.
Not all income is taxable income, however. Standard deductions and personal exemptions can be subtracted from what you make. These will vary depending on your personal situation. You can use an interactive website like MoneyChimp.com to get a detailed calculation of how much in taxes you will pay after deductions and exemptions. Knowing the highest tax bracket you will fall into can help you determine how much tax you might pay on extra income you earn or, conversely, how much tax you will save by increasing your deductions.
Managing your personal finances may sound tedious and time consuming, but it has rewards. Remember the following tips:
Set your financial goals.
Make a plan to achieve these goals and stick to it.
Pay yourself first, start early, and pay often.
Use debt wisely and establish good credit.
Make sure you and your assets are insured.
Soon enough you’ll be on the road to financial success.