What Is My Tax Bracket, and How Does It Effect My Return?
Once the months of March and April roll around, you know it's tax season. In order to become tax-efficient, it's important to know that your tax bracket determines how much federal income taxes you'll pay each year—the higher your income, the greater amount of federal income taxes you pay, which is known as a progressive tax system. Colleen McCreary, chief people officer at Credit Karma, explains that your tax bracket can change year to year since the federal government makes annual inflation adjustments to tax brackets; this means that the 2020 federal tax brackets are marginally different than the tax bracket that pertained to the 2019 taxes. This year, the seven federal tax brackets for the 2020 tax year are as follows: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.
"There are many helpful tools out there—for example, Credit Karma has a Federal Income Tax Calculator to help you estimate your 2020 federal income tax obligation and give you a rough idea of whether you can expect a refund this year," she says.
Your Tax Bracket and Filing Status
So, how does your tax bracket affect your return? McCreary explains that bracket thresholds vary depending on your filing status—single, married filing jointly, qualifying widow(er), married filing separately, or head of household. "Knowing how much you might owe could allow you to make adjustments accordingly throughout the year—to either avoid a big tax bill when you file if you're paying too little or to keep more money in your pocket if you're overpaying," she adds. McCreary says that the importance of know that each state's approach to income taxes varies as well.
Lowering Your Tax Bracket
Before filing your taxes, there are ways you can reduce your tax bill through eligible credits and deductions. "A tax credit is a dollar-for-dollar reduction in the amount of tax you owe, and if refundable, can even get you a bigger refund," explains McCreary. "But take note that credits won't affect your tax bracket—instead, they affect your total tax bill after tax brackets come into play." Tax deductions, on the other hand, lower your taxable income by the percentage of your highest federal income tax bracket. In other words: Take all the tax deductions you can claim—they'll reduce your taxable income and drop you into a lower bracket, which means you pay a lower tax rate.