Learn how you can achieve more and build wealth more efficiently by gaining a better understanding of tax brackets…
Caution: 12-minute read
In the United States, many consumers who are required to file a federal (and state) tax return often find understanding of the system to be difficult and hard to comprehend. However, the system is not as complicated as many think for most taxpayers and if you file taxes in the United States, you want to put yourself in a more favorable position so that you can achieve at a higher level of excellence throughout your lifetime!
In this discussion TheWealthIncreaser.com will end the 2024 tax season by focusing on taxes and how you can gain a better understanding of “tax brackets” so that you can achieve more throughout your lifetime and better prepare for the filing of your 2025 taxes next year, and taxes that you will file in future years.
It is the desire of TheWealthIncreaser.com that you will sincerely build wealth more effectively and gain a real understanding of tax brackets as a result of visiting this post.
In order for you to better follow this discussion, a few terms will be defined by TheWealthIncreaser.com:
Effective tax rate–your effective tax rate would be the rate that you are taxed at from an overall perspective. If you are in the 10, 12 and 22% tax bracket, your effective rate would be averaged out based on your taxable income and the various tax brackets.
Marginal tax rate–-your marginal tax rates are based on your income according to IRS guidelines and they range from 0, 10, 12, 22, 24, 32, 35, and 37%.
Alternative Minimum Tax–if you had very high income and would be able to avoid taxation altogether or at a very low level under the current tax code, the AMT would come in to ensure that you paid taxes at a minimal level.
Net Investment Income Tax--if you have high income, generally $200,000 and up, you will pay an additional tax of 3.8% on your capital gains after the sale of your assets on your tax return.
Ordinary income–your income that is taxed at ordinary income rates based on your marginal tax rates mentioned above.
Income–income is earnings that come into your household on a daily, weakly, bi-weekly, monthly or annual basis and can take on many forms.
Capital gain–sale of an asset at a gain, usually taxed at the more favorable rate of 0, 15, or 20% which is normally lower than the ordinary income tax rate of many who sell assets.
Dividend–a payment made by corporations to shareholders of record, not all companies pay dividends.
Qualified dividend–a dividend that is taxed at the capital gains rates of 0, 15, or 20%, and is generally more favorable to taxpayers.
Qualified Business Income–taxation on a portion of your pass-through income can possibly be avoided if you qualify for the QBI (pun intended) deduction.
Modified Adjusted Gross Income–income on your tax return after certain adjustments are made, those adjustments will generally lower your taxable income and could put you in a more favorable position for credits, deductions and a lower amount of taxation.
Taxable income–income that is subject to taxation after all of your adjustments, deductions and credits have been entered generally.
Mileage rate–a rate that is paid for business, medical, charitable travel etcetera that is adjusted annually. The rates differ with the highest going to business mileage.
Standard deduction–the deduction outlined by the IRS that is of a set amount and is usually adjusted upward annually due to inflation. If the amount is higher than if you itemize, you will generally choose the standard deduction, however there are exceptions when itemized may be a better option even when lower than the standard deduction, so be sure you have a highly competent tax professional to guide you along.
Itemized deduction–deductions that you can take on your tax return that have the potential to increase your tax refund or reduce the amount that you owe if the amount is higher than the standard deduction mentioned above. The deductions available among others include–medical, taxes, mortgage interest, and charitable contributions.
Exemption–personal exemptions are no longer allowed on tax returns or form W-4 as a result of the TCJA of 2017.
Form W-4–you can complete a W-4 form and claim qualifying children and dependents and enter amounts that you want to withhold so that you can avoid underpayment of taxes or get a larger refund. The tax system in the United States is pay as you go, and if you fail to do so, you will be penalized–and that will force you to be in the know.
Estimated taxes—taxes paid over the course of the tax season, usually on, April 15, June 15, September 15, and January 15 of the new year. By paying the right amount or at least being in the ballpark area, you can avoid the penalty for failure to pay your taxes and stay in good standing with the IRS.
Credits–an advantage to you when you qualify that has the effect of reducing your taxes dollar for dollar, thereby providing a bigger refund or the paying of less in taxes. Credits are better than deductions.
Deductions–an advantage for you on your taxes that are not dollar for dollar but based on a percentage of your taxable income. They can also provide a bigger refund or the paying of less in taxes for you at tax time.
A dependent is generally a qualifying child or relative who relies on you for financial support. To claim a dependent for tax credits or deductions, the dependent must meet specific requirements outlined by the IRS. You cannot claim yourself as a dependent.
The above definitions are the creator of TheWealthIncreaser.com’s take, for a more technical definition of the tax terms click on the links above!
Most who file income taxes in the United States will pay taxes at a rate that is based on their income. Their “marginal tax rate” would be where their income tops off at and is based on tax rates and schedules that come out annually.
Your “effective tax rate” effectively combines all of the rates based on your income and averages out the rates to give you your effective tax rate, which is the actual amount of taxes percentage wise, that you would be paying based on your taxable income.
On the following chart you will see the tax rates in effect for the 2024 tax year. Keep in mind that the numbers adjust annually due to inflation and market activity.
For tax year 2024, the top marginal tax rates are:
37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly).
The other rates are:
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- 35% for incomes over $250,525 ($501,050 for married couples filing jointly).
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- 32% for incomes over $197,300 ($394,600 for married couples filing jointly).
- 24% for incomes over $103,350 ($206,700 for married couples filing jointly).
- 22% for incomes over $48,475 ($96,950 for married couples filing jointly).
- 12% for incomes over $11,925 ($23,850 for married couples filing jointly).
- 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly).
Note: Income for taxation at the above rates are based on taxable income for the year, not your gross income for the year!
April 15th is normally the filing deadline for individuals. In years when April 15 falls on a weekend or holiday, the deadline gets pushed up to the next business day.
Failure to file–25%
Failure to pay–5% monthly on any balance that is due and maxes out at 25%
.5% if filed on April 16th
Interest also accrues, at a rate of 3 percent, compounding daily.
Some taxpayers affected by recent natural disasters get extra time to file if it is in a federally declared area.
If you are due a refund, you have a 3-year window from the filing deadline to file and claim your refund, otherwise you lose the ability to claim the refund on your federal tax return for the year(s) in question.
The filing of form 4868 before the April 15th deadline gives you a 6-month extension–and you can file the form yourself or have your tax professional file. You can also make a provisional tax payment if you expect to owe.
You risk not only a possible “reduction in taxes owed” or a “tax audit” by rushing and not taking advantage of all of your adjustments, credits, and deductions and reporting all of your taxable income, therefore if you need extra time, it may be wise to extend and pay before the 6-month extension expires.
Form 1098 Mortgage Interest Statement that is provided to homeowners at tax time will reveal at a minimum your principal and interest payments for the year–points and partial interest may be on your 1098 closing disclosure or settlement statement (be sure store these documents and home improvement documents in a permanent file as they cost time and money to replace) and not included and/or also on form 1098.
Therefore, your first year after purchase you may want to provide form 1098 along with your closing documents to your tax professional and also sign up for homestead and other exemptions that you may qualify for at the state and local level. Whether you should Itemize or take the Standard Deduction should be analyzed annually to see which option serves you and your family better.
The amount of your adjustments, credits and deductions claimed may allow you to fall into a lower tax bracket which could lead to the lower payment of taxes, or you receiving a higher refund!
Always realize that tax penalties can be substantial and lead to your building of wealth being stagnated, therefore do your best to avoid failure-to-file, late penalties, and any other tax penalties.
Tariffs—WTO or World Trade Organization is in existence to help regulate world markets to help establish predictability on the world stage. In early April 2025, world markets were impacted in an unprecedented way as the United States moved away from world trade cooperation to a world trade paradigm shift of isolation.
Even though tariffs are paid by others, when a country implements tariffs, ultimately you as a consumer will pay in the end. Consumer driven economies will be hurt the most–generally. Your increased spending as a result of tariffs is in essence a tax, as those increased payments for goods did not exist before the tariffs. In addition, expect countries whom tariffs were levied against to implement tariffs (retaliatory) in an effort to protect against substantial trade imbalances and also seek other markets to unload their goods.
Progressive tax rates in the United States range from 10% to 37% and the goal is for those who make more to pay more–because they have a higher ability to pay. A tariff causes increases in prices that are often passed on to consumers and is in effect regressive as all pay regardless of income level and is similar to a sales tax that is also regressive.
Many economists in the United States predict an average increase of $5,000 or more per household (some predict $3,500 to $7,000) in spending annually as a result of tariffs, and those at the lower end of income will be hurt the most as no progression is in play here (those who earn less have a lower ability to pay)!
In simple terms, a tariff is a tax paid by you if you were an importer (for example, you import vases from India) you would pass that tax (or a lower amount) on to your consumers depending on the financial strength of your company. If you pay a tariff or any other tax as a result of obtaining the vases, you would generally pass the costs on to the consumer (unless you were benevolent) as you are in business to make a profit.
The other country whom the tariff is imposed against does not pay the tariff!
When it comes to tariffs, the higher your income or net worth, the less you would be affected by tariffs. If you earn $50,000 you will be hit harder than someone making $500,000, as those who are at the higher end of the “earnings” spectrum are in position to take the expected $5,000 in additional payments on an annual basis in stride, while those who make less will have a much shakier ride.
Tariffs can change the way you live economically and you want to prepare yourself as best you can by implementing steps that you can take immediately!
If you are new to this site, you want to familiarize yourself with steps that you can take now–or for repeat visitors, continue to follow the steps that you have been following for years–as your goal is to continue to live your life in balance, regardless of what is occurring in the political, regulatory, economic, societal, technological or legal realm.
In light of the 6 trillion lost in stock market activity earlier this month that is causing concern for many, TheWealthIncreaser.com will offer ways that you can possibly reduce the stress that tariffs and other negative market activity is causing, so that you can achieve more during what appears to be difficult and volatile market activity for an indefinite or unknowable period.
Whether you are just entering the workforce, or you have been working for years, you want to know your retirement number for at least a 30 year period after you retire, or up to age 95 at a minimum. In spite of all that is happening in the markets, you may want to stay the course or make adjustments–depending on where you are at as far as reaching your retirement number, your risk-tolerance level, and other goals that you have at this time.
The markets are currently shaking (as of April 4th, 2025) but they are not yet destroyed, and by continuing to dollar cost average, re-balance and utilizing diversification of your assets at this time and doing so with more consistency over time, you may be able to achieve more.
You can use asset allocation, diversification and re-assessment of your holdings now, to put your mind more at ease about your future. Money market accounts, bonds and bond funds, high yield savings, CDs etcetera may need to be looked at and an increased percentage devoted to those accounts, as you may want to reduce your equity position depending on your goals and timeline needed to reach your goals.
In this and any economy, you can always decide to spend less, use intelligence in shopping, and take advantage of other money savings strategies that are available. You may want to wisely make auto and big-ticket purchases and not be led astray by marketing and other distractions. Many purchases can be put off or purchased later when and where applicable. Your planned home improvement may have to be re-analyzed and possibly done at a later date or scaled back some. Additionally, a side gig or second job may be needed or at least given real consideration by you, so that you can continue on your path of making your dreams come true.
Conclusion
Always remember that tax brackets adjust annually, and you want to have an idea of how your income is taxed and at what marginal and effective tax rate, so that you can compare from year to year and use analysis to not only plan better, but also implement those plans more effectively and efficiently to help you achieve the goals that you desire in a more time certain manner.
Your tax professional should be able to provide you comparison data (and explain the data) from year to year on your “marginal” and “effective” tax rates that you paid so that you can use the data to your advantage in future years.
If your marginal tax rate is 22% and your effective tax rate is 13.4%, you want to know that–as by knowing you can gauge what you are paying tax wise as compared to others in your society and use the numbers to plan for your tax payment and earnings in future years based on realistic data!
Effective tax management plays an important role in your overall wealth building success, and it is important that you at a minimum learn the basics about taxation as taxation in various forms are here to stay.
Always remember, if you don’t contribute to the solution by managing your taxes and finances more effectively, your lack of engagement is normally the main problem that is preventing you from achieving more and building wealth more efficiently during your lifetime.
Isn’t it time you use your mental makeup in a better way, so that you can live to fight another day?
The time for effective action is now, and by landing on this blog you can “really” learn how!
Your ability to comprehend and understand tax brackets can put you in position for a lifetime of success for those who live in the U.S., and for those who are willing to give it their absolute best.
By understanding and applying at a minimum what you will learn from tax basics, tax brackets and how tax withholding occur, you will put yourself well ahead of the average taxpayer, however you want to be more than just ahead–your goal is to give it your absolute best so that you will achieve ultimate success as you put procrastination to rest.
All the best as you reach higher to achieve the goals that you truly desire, and at the same time put yourself in position to avoid a financial and tax filing quagmire….
Disclaimer – TheWealthIncreaser.com does not provide and does not intend to provide financial, investment, tax, or legal advice. Information contained in this article is for informational and educational purposes only. This article is the author’s opinion based on experience, research and publicly available information. The inclusion of links to third-party content is not an endorsement by TheWealthIncreaser.com of such content or services but is included to save you valuable time. Please do your due diligence, independent research and use your own discretion.
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