If you've ever received a paycheck, I would hope that you've noticed that what you make is not what you take home. As we previously mentioned in this unit, your paycheck has withholdings. Withholdings are money that is deducted from your gross pay. Some of those withholdings go towards federal and state taxes. The amount of money that is withheld from your gross pay for federal taxes is based on your federal tax bracket. The way the U.S. tax system is designed is such that people who make more money are supposed to pay more in taxes, and vice-versa.
When you first take a new job, the Human Resource department will have you fill out a W-4 form for payroll. On that form, you will declare your filing status to your employer. Depending on your selections will depend on the "contributions" or withholdings your employer takes out.
Note that on a W-4 form, a person must select one of the following filing statuses:
The selection will help to put you into a specific federal tax bracket. It is important to note that the tax brackets change yearly.
| Tax Rate | Single | Married Filing Jointly or Qualifying Surviving Spouse | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 10% | \$0 to \$10,999 | \$0 to \$21,999 | \$0 to \$10,999 | \$0 to \$15,699 |
| 12% | \$11,000 to \$44,724 | \$22,000 to \$89,449 | \$11,000 to \$44,724 | \$15,700 to \$59,849 |
| 22% | \$44,725 to \$95,374 | \$89,450 to \$190,749 | \$44,725 to \$95,374 | \$59,850 to \$95,349 |
| 24% | \$95,375 to \$182,099 | \$190,750 to \$364,199 | \$95,375 to \$182,099 | \$95,350 to \$182,099 |
| 32% | \$182,100 to \$231,249 | \$364,200 to \$462,499 | \$182,100 to \$231,249 | \$182,100 to \$231,249 |
| 35% | \$231,250 to \$578,124 | \$462,500 to \$693,749 | \$231,250 to \$578,124 | \$231,250 to \$578,099 |
| 37% | \$578,125 or more | \$693,750 or more | \$346,875 or more | \$578,100 or more |
Many people misunderstand this table. I'm sure at some point in your life, you will hear someone say something like "I fell into a new tax bracket and that is why I owe the government money." In reality, very few people understand how this table actually works. It works like a ladder, you only pay the rate for each "step" or bracket you are in. For example, if you are a person filing single and your taxable income was \$100,000 last year, you aren't paying 24% of \$100,000, you would only pay 24% of \$100,000 - \$95,374 = \$4,626, and then the rest for each of the other brackets. Twenty-four percent of those two numbers are very different!
Tyree had a taxable income of \$52,400 for 2023. If Tyree files his taxes as a single individual, how much money does he owe the federal government?
Note that Tyree falls into the 22% bracket, but that doesn't mean he pays 22% of his entire taxable income. We need to break it down into his appropriate brackets like stepping up a ladder.
Bracket 1 (10%):
$$\$11,000(0.10) = \$1,100$$Bracket 2 (12%):
$$(\$44,724 - \$11,000) = \$33,725$$ $$\$33,725(0.12) = \$4,047$$Bracket 3 (22%):
$$(\$52,400 - \$44,725) = \$7,675$$ $$\$7,675(0.22) = \$1,688.50$$Total Owed:
$$\$1,100 + \$4,047 + \$1,688.50 = \$6,835.50$$Why is it important to file taxes? A number of things can happen if an individual doesn't file their taxes:
This is not an inclusive list of all repercussions that can occur from not paying taxes.
Did you know that the money you are taxed or pay the federal government is used to fund a number of different expenses that the United States takes on each year? The breakdown of these funds varies from year to year as the federal government allocates resources according to priorities. The 2023 Fiscal year budget was approximately $7.6 trillion dollars.
Major Budget Categories (2023):
The allocation of federal funds changes based on priorities set by Congress. For example, compared to 2018, the 2023 budget increased spending on education while decreasing spending on veteran benefits. Understanding where tax dollars go can help citizens make informed decisions about budget priorities and government spending.
If a single taxpayer had a taxable income of $75,000 in 2023, how much federal income tax would they owe? Use the tax brackets table above and calculate the tax owed step by step for each bracket.