By Kristen Doerer and Karim Doumar, ProPublica
This story was originally published by ProPublica.
What is a tax class?
The federal government taxes people based on how much they earn each year. Seven tax brackets – based on income ranges – determine how much you will pay:
What are the registration categories for income tax brackets?
In addition to these brackets, there are four main categories, also known as “status”, that affect your taxation:
- Single filers: unmarried.
- Married, Submit Together: Couples Submitting Together.
- Married, filed separately.
- Head of household: unmarried, lives with a qualified child.
Together, the categories and brackets look like this:
How do tax classes work?
If you look at the table above, you can assume that you will simply be taxed at a lump sum on all your income. But it’s more complicated.
The US has what is called a progressive tax system. What this really means is that the amount you get taxed progresses with the amount of money you make – even within the tax brackets listed above.
example: Let’s say you are a single filer and have taxable income of $ 20,000. You would fall into the 12% tax bracket, but you wouldn’t just be taxed at 12%. Instead, you would be taxed at the lowest tax rate for the first $ 9,875 you earn and higher tax rates for the money you make above it.
In other words, you would be taxed in two different tax brackets: $ 0 to $ 9,875 and $ 9,876 to $ 40,125. You will only be taxed 10% on the first $ 9,875 you earn. The remaining $ 10,125 you earn will be taxed at the next tax bracket of 12%. So you would owe $ 988 for the first bracket and $ 1,215 for the second bracket.
What are the differences between state and federal tax brackets?
The graphic above shows the federal income tax brackets. Many states also have their own separate tax brackets. Each state has its own set of rules, but they generally tax income at lower rates than the federal government. Most states have a progressive tax structure similar to that of the federal government. There are a few exceptions, however.
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Seven states Do not tax any income at all:
- Alaska
- Florida
- Nevada
- Texas
- South Dakota
- Washington
- Wyoming
Tennessee and New Hampshire do not tax income from wages, but they do tax some income from investments.
Nine states Tax revenue at a lump sumno matter how much you earn:
- Colorado
- Illinois
- Indiana
- Kentucky
- Massachusetts
- Michigan
- North Carolina
- Pennsylvania
- Utah
What tax class am I in?
To determine your tax bracket, you need to know your 2020 taxable income. To do this, you need to find out two things: yours income and your Tax deductions.
- Income: In principle, all income is taxable income. This includes your salary, wages, tips, any payment for freelance work, real estate sales, unemployment benefits over $ 10,200, and more. (This also includes capital gains, which can be taxed differently depending on the short or long term and your income.)
In general, once you have your total income, you can subtract any deductions to arrive at your taxable income. Check out the table above to find out where you are.
What is the standard deduction?
The most common tax deduction used is the Standard printThis is a no-questions-asked amount that you can deduct from your income to lower the amount of income that you have to pay tax on. Before claiming the standard deduction, please make sure you understand the rules. For example, you cannot deduct mortgage interest if you are also using the standard deduction. (For your 2020 taxes, the CARES Act allows you to deduct up to $ 300 in charitable donations in addition to the standard deduction.)
example: Take a single person whose only income is their salary of $ 32,000. If they only took the standard $ 12,400 allowance, they would have taxable income of around $ 20,000. That means they fall into the 12% class.
Do I have to pay tax on unemployment benefits that I have received?
Unemployment insurance is considered income and is taxable. Thanks to President Joe Biden’s March 2021 Stimulus Bill, the first $ 10,200 of unemployment income you received in 2020 will not be taxed for earners who earned less than $ 150,000.
You can use a tool on the IRS website to determine if you need to pay tax on your unemployment benefits.
What is an IRS Tax Audit?
An IRS audit is a review of a person’s tax return by an IRS employee to make sure everything was done right. Sometimes you will be chosen at random, but usually something or someone will highlight your return on investment, which will result in it being marked for an audit.
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This is important: if you get audited, you will find out by email – never by phone.
You can also hear from the IRS through a tax declarationThis is usually less severe and can happen for a number of reasons, such as: B. to verify your identity or the identity of your loved ones or to correct a math error.
How far back can the IRS audit be?
The IRS can include the last three filing years in a tax audit. However, the agency can look back further if it encounters a fatal error. It usually doesn’t look back more than six years.
Who is being audited?
Taxpayers with household incomes between $ 50,000 and $ 100,000 are the least scrutinized.
As ProPublica has reported, the IRS has slashed its budget year on year (although it received a boost in funding under the March 2021 Boom Act), and its ability to scrutinize the rich and corporations has suffered as well. Nowadays, The top earning 1% of taxpayers are checked at about the same rate than those who claim that Earned Income Tax Credit (EITC), a group with an average household income of $ 20,000 per year.
A 2019 analysis found that one rural county in the Mississippi Delta was audited more often than any other county in America, even though more than a third of its predominantly African-American population is below the poverty line. Also, the five counties with the highest exam rates are all rural, mostly African-American counties in the deep south.
“Those who struggle to make ends meet are unjustly scrutinized while the lucky few dodge taxes to no avail,” Senator Ron Wyden, D-Ore., The senior Senate finance committee member, told ProPublica in the year 2018.
Has Trump’s tax plan created new US tax brackets?
The short answer is no.
But Trump’s tax plan has changed the percentage you are taxed within the tax brackets. In most cases, it reduced the amount that individuals would be taxed in each bracket, with the exception of the lowest bracket, which stayed the same at 10%. The changes are expected to expire in 2025. From this point onwards, Congress will have to reintroduce tax law, or much of it will go back to what it was before 2018.
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Tax brackets change a little each year to keep up with inflation and the rising cost of living.
About this guide:
ProPublica has reported extensively on Taxes, the IRS Free File Program, and the IRS. Specifically, we covered the way the for-profit tax preparation industry – companies like Intuit (TurboTax), H&R Block, and Tax Slayer – advocated the Free File program and then systematically undermined it with evasive addiction tactics and confusing design . These companies are also working to populate search engine results with tax guides that sometimes direct users to paid products. This guide is not intended to provide personalized tax advice and you should speak to a tax professional about your specific tax situation.