A Guide To How Tax Brackets Work

If you are working, you may wonder how tax brackets work. It may seem very confusing but it doesn't have to be. Tax brackets are actually fairly straightforward and simple to understand, as well as the rationale behind them. Even if you do not agree with them, it is still important to understand tax brackets and how they can affect you and the amount of money you are bringing home.

Tax brackets are basically predetermined amounts of yearly income. Any income which falls within this range is taxed at a certain rate. That is, a certain percentage of each pay check is taken by the government and applied toward your income taxes. If you are self employed, this is the amount of your income that you will need to set aside to pay toward your taxes. This is easy enough, but if we include the alternative minimum tax things can get confusing. Though it tends to impact the upper brackets most commonly.

This may seem fairly straightforward, and it usually is. The part that some people have trouble understanding is that tax rates are different at different income levels. People with very high incomes are usually taxed at a higher level than people with lower incomes. This is because the government feels that people with higher incomes can afford higher taxes than people with lower incomes.

People normally do not have an issue with tax brackets unless you have recently moved into a higher tax bracket. If you have received a small raise and are just on the edge of the next bracket you may find that you actually make less money per pay check than you did at the previous tax bracket.

If you are unsure of how your income will be affected by a raise or you want to know what the different tax brackets are, you should consult an experienced book keeper or income tax preparer.

Knowledge of tax brackets and which one you are in can make sure that you do not suffer any unpleasant surprises when it is time to pay your taxes.