It’s a common misconception, but not every cent you earn is taxable by the government. No one likes to do their taxes, but think of it this way: When you fill out your tax forms, you’re actually trying to lighten your tax load by figuring out what exemptions and deductions apply to you. The income tax calculator we created can help you understand your income and plan for taxes.
What is Taxable Income?
To figure out what’s taxable (and what’s not), you first need to figure out your gross income. Gross income is all the money you’ve made in a year, whether earned (via your salary or wages, tips, unemployment payments, or other work-related sources such as running a business) or unearned (non-work sources such as interest, rent, or alimony you’ve been paid). The sum of those two numbers is your gross income.
Once you know your gross income, doing your taxes helps you figure out just how much of that number is taxable. When you choose your tax form and filing status, you’ll be able to subtract a certain amount to arrive at your adjusted gross income. And once you fill out the form, you’ll probably be able to reduce that number further, via deductions. Some people take the standard deduction, while others itemize them. (More on that later.)
Finally, once you’ve subtracted deduction(s) from your adjusted gross income, you may get to claim exemptions to slash that number one more time. You typically claim an exemption for someone who relies on your income, like your spouse or children. Sometimes you can even claim yourself. Once that’s done, voila: The number that’s left is your taxable income.
So what income isn’t taxable?
The bad news is that almost everything you’re paid over the course of the year is taxable. It’s probably easier to talk about what isn’t taxable. That includes:
- Child support
- Court-ordered damages for injury or sickness
- Scholarships and fellowships
- Veterans’ benefits
- Workers’ compensation
For a full list of taxable and nontaxable income sources, check IRS Publication 525.
How is my tax calculated?
The federal income tax that almost all of us pay is progressive. Essentially, that means the more you make, the more you’ll be taxed.
If you’re fortunate enough to earn a high wage, you’ll be happy to note that a higher tax rate doesn’t apply to your entire income. Instead, Uncle Sam uses marginal tax rates to help figure your share: The first chunk of your income is taxed at the lowest rate, the second chunk is taxed at the next-lowest rate, and so on.
A tax bracket determines what tax you’ll pay on a particular chunk of your income. Federally, there are seven of these brackets ranging from a low of 10% to a high of 39.6%. However, keep in mind that your filing status (single, married filing jointly, married filing separately, head of household) will determine the amount of income taxed within each bracket.
For instance, a single person is taxed at 10% on the first $9,075; if you’re married filing jointly, the 10% rate applies to your first $18,150 earned.
Here are the tax brackets for the 2015 tax year:
|Rate||Single||Married Filing Jointly||Married Filing Separately||Head of Household|
|10%||Up to $9,225||Up to $18,450||Up to $9,225||Up to $13,150|
|15%||$9,226 to $37,450||$18,451 to $74,900||$9,226 to $37,450||$13,151 to $50,200|
|25%||$37,451 to $90,750||$74,901 to $151,200||$37,451 to $75,600||$50,201 to $129,600|
|28%||$90,751 to $189,300||$151,201 to $230,450||$75,601 to $115,225||$129,601 to $209,850|
|33%||$189,301 to $411,500||$230,451 to $411,500||$115,226 to $205,750||$209,851 to $411,500|
|35%||$411,501 to $413,200||$411,501 to $464,850||$205,751 to $232,425||$411,501 to $439,000|
|39.6%||$413,201 or more||$464,851 or more||$232,426 or more||$439,001 or more|
All these different numbers make it tricky to say what your tax rate is when it’s all said and done. There are a couple of main ways to look at it:
- Marginal tax rate: If you file as head of household and make $100,000, your marginal tax rate is 25% — that’s how much you pay based on the last chunk of your income. This is the easiest way to think about things, but it’s also a bit misleading since you don’t actually pay 25% in federal income tax on the whole $100,000. Instead, you pay 10% on the first $13,150, 15% on the next $37,049 and 25% on the final $49,801.
- Effective tax rate: Your effective tax rate, on the other hand, is the average rate at which your income is taxed. To figure it out, you divide the taxes you owe by your taxable income. So if your taxable income was $100,000 and you paid $22,000 in taxes, divide $22,000 by $100,000 and you get 0.22, or a 22% effective tax rate.
State Income Tax
Most of us aren’t done paying income taxes at the federal level, though. All but nine states demand a share of your income, too. California, Hawaii and Oregon have the highest income tax rates on the books at 13.3%, 11%, and 9.9%, respectively. However, note that those are these states’ highest tax brackets and, just like federal income taxes, they only apply to the uppermost portion of high wage earners’ income. For instance, in California, only your income above and beyond $1 million will be taxed at 13.3%. If you make $100,000, the highest rate at which you’ll be taxed is 9.3%.
States without an income tax are:
- New Hampshire (salary/wages not taxed; dividends, investment income still taxed)
- South Dakota
- Tennessee (salary/wages not taxed; dividends, investment income still taxed)
- Adopting a child
- Buying a fuel-cell or plug-in vehicle
- Installing “green” home energy sources such as solar panels or geothermal heat pumps
- Paying for childcare or dependent care so you can work, look for work, or go to school
- Paying educational expenses for yourself, a spouse, or a dependant
- Purchasing health insurance through the federal marketplace
- Saving for retirement
- Working outside the U.S.
- Mortgage and student-loan interest
- Charitable contributions
- Job-related moving expenses
- Medical expenses over 10% of your AGI
- State and local income, property, real-estate, and sales taxes
Before you pack your bags for one of these states, however, consider that most of them make up for the lost money somewhere else, such as higher sales, property, or gasoline taxes. Also, if you live in a state without income tax and work in an income-tax state, or vice versa, you’ll end up paying state income taxes either way.
Some cities and counties also impose a small income tax, too, but these are generally quite modest.
How Do I Keep My Taxes Low?
It’s tough to avoid taxes altogether (legally, anyway), but there are several strategies you can use to reduce your taxable income. Here are some of the tried-and-true basics:
1. Save for retirement.
Hopefully you’re doing this already, but if not, consider the tax benefits an extra incentive. Contributing to a traditional IRA or 401(k) will reduce your adjusted gross income. You don’t get off scot free, however — you simply defer the taxes you would pay on the contributions until you make a withdrawal in retirement. (A Roth IRA, on the other hand, requires you to pay taxes on your contributions now, but allows you to withdraw money tax-free in retirement.)
You can contribute up to $18,000 a year to a 401(k), or $24,000 if you’re 50 or older, and reduce your taxable income by an equivalent amount. You can contribute up to $5,500 to an IRA, or $6,500 if you’re 50 or older.
If you’re managing to save for retirement despite a low or moderate income, be sure to see whether you qualify for the Savers Credit of up to $1,000 (or $2,000 for married filers) when you file your taxes.
2. Take advantage of health savings accounts or flexible spending accounts.
If you anticipate spending a lot on healthcare, you can make tax-deductible contributions to a health savings account (HSA) if you qualify to open one (typically by having a high-deductible health plan and no other medical coverage). If you’re single, you can stash up to $3,350 in this account for 2016; families can sock away up to $6,750. Then, use these funds to cover co-pays or health care deductibles. You don’t have to use it all in one year — contributions can remain in the account to grow tax-free. You’ll only owe taxes on this money if you use withdrawals for unqualified, non-medical costs.
If you don’t qualify for an HSA, you may still be able to make pre-tax contributions to an FSA, or flexible spending account, for qualified medical expenses. Contribution limits are lower ($2,500) and you must use the entire balance within the year or forfeit any unused amount.
3. Don’t miss out on any applicable tax credits.
People talk a lot about deductions. That’s because almost all of us can deduct something or other to reduce our taxable income, and therefore our overall tax bill. Tax credits, however, are where the real savings lie. That’s because a tax credit is applied to your final tax bill, whereas the deduction simply reduces the taxable income you’re starting from. Some tax credits are even refundable, meaning that even if you end up owing less in taxes than the value of the credit, you’ll get a refund for the excess — and if you’re already getting a refund, you’ll receive an even bigger one.
You may be able to get a tax credit for several reasons, including:
One credit everyone should make sure they’re taking advantage of, if eligible, is the Earned Income Tax Credit, which is meant to soften any tax blow for low-income workers. In 2016, single filers without children may qualify with an income of less than $14,820; if you’re married filing jointly, the limit is $20,330. Limits are more generous for those with qualifying children — for example, single filers can still qualify if they earn up to $39,131 with one child, $44,454 with two children, or $47,747 with three or more.
4. Think about itemizing your deductions.
Taxes are complicated, and it’s tempting to take the easiest route whenever possible, especially if you’re filing at the last minute. That usually means taking the standard deduction ($6,300 for single filers, $12,600 for those married filing jointly, $9,250 for heads of household) to avoid the hassle of itemizing your deductions.
But if you have a lot of expenses in certain categories that may add up to more than your standard deduction, itemizing could make sense. Common itemized deductions include:
Remember that you’ll need good records and receipts related to all these expenses. For more details, including a complete rundown of whats you can itemize, see the Instructions for Schedule A from the IRS.
The Simple Dollar Income Tax Calculator
To help you cut through all the tax talk and figure out what you owe, The Simple Dollar has built a simple income tax calculator to help you figure out your bottom line.
To use it, simply select your state of residence and tell us what your gross income is for the year. Next, select whether you’ll be choosing a standard deduction or itemizing. Finally, tell us whether you’re married, and if so, whether you’re filing separately or jointly. If you’re filing jointly, we’ll also need to know your spouse’s gross income.
Once you input that info, you’ll be able to see our estimates for what you’ll owe in federal income tax, state income tax (if applicable), and your expected take-home earnings.
Getting a Refund?
Sometimes you actually end up paying more in taxes throughout the year than what you owe. When that happens, you’re owed a refund, and Uncle Sam (or your state, in the event you get a state income tax refund) will send you a check once your tax return is accepted.
Getting money back can be a thrilling proposition. In fact, the average American received a refund of more than $2,800 last year. But consider this before you celebrate too much: It was your money all along. Your tax refund isn’t a gift from the government. It just means you paid too much throughout the year — in effect, you’ve been giving Uncle Sam an interest-free loan.
If you’d rather get that money when you’re really owed it (with each and every paycheck), you need to take another look at your W-4. That’s the form you fill out when you start a job, telling your employer what to withhold for taxes. The number withheld is based on personal allowances — typically, one allowance each for yourself and any dependents. Filing as head of household may mean additional allowances. The IRS offers a Witholding Calculator that will help you get your W-4 right (and put more money back in your paycheck).
About this resource:
Created on: February 29, 2016
Updated on: February 29, 2016
Edited by: Jon Gorey
Research by: Saundra Latham