How to Determine Your Tax Rate

Goffstown, NH Resident Has Questions

The tax bracket that you fall into determines the tax rate that you will pay on your income. There are seven tax brackets, ranging from the bottom at 10% to the highest rate of 37%. Factors that can affect your tax bracket include your total income, total adjusted income, number of dependents, tax credits, whether you are filing single or married, and many other financial factors. Each year the IRS releases updated tax brackets, with the accompanying tax rate for each. Keep in mind that all your income is not taxed at the highest rate, only that which exceeds the previous brackets pushing your additional income into a higher tax rate that will be taxed at this new rate.

A Goffstown resident was mistaken in assuming that all his income would be taxed at the same rate, based on the total adjusted income for his household. The team at Merrimack Tax Associates were able to shed some light on how the progressive tax system works.

Progressive Income Tax System Means Not All Income is Taxed at the Same Rate

While your tax rate is determined by the tax bracket issued by the IRS each year, this does not mean that all of your income is taxed at the highest rate for your income level. The adjusted income that falls within the dollar amount of the first bracket is taxed at this lower rate. Additional income that falls within the range set for the second bracket is set at this next tier’s tax rate and so on. The tax rates as defined by the brackets start at a 10% tax rate and top out at 37% for those earning the highest income levels.

Reducing Taxable Income to Stay in Lower Tax Rates

There are many ways to reduce your taxable income, thereby reducing the amount of money that you pay in taxes. These include deductions from charitable contributions, retirement savings, and many other tax credits. All these items can reduce your total adjusted income, affecting how much you will wind up paying in taxes.

The Goffstown resident was pleased to hear that all his earnings would not be taxed at the highest rate thanks to the progressive tax system. He now has a better understanding of how his tax rate is determined and what to expect in the future.