2019 TAX BRACKETS: WHAT YOU NEED TO KNOW TO DO YOUR TAXES
For the uninitiated, filing taxes can get complicated and overwhelming. And one of the most important concepts a law-abiding citizen must understand is tax bracket.
The tax bracket is the segmentation of tax rates that you need to pay for in your taxable income. As the United States follow a progressive tax filing system, the tax bracket allows its citizens to pay similar taxes on similar income levels. As the taxpayer's income rises, he or she will pay more in taxes.
Understanding tax brackets, alternative minimum tax and qualifying tax credits and deductions for your situation give you better footing to filing your taxes effectively and correctly.
How tax brackets work
You may have heard some people throwing away the phrase “tax bracket” quite often, especially during tax time. Some of them may even complain that having more income means moving up in their tax brackets and hence, paying more in taxes. That is because any additional revenue they incur requires paying more in taxes in the corresponding brackets they fall in.
It is important to note though that you’ll generally fall into the highest taxable rate based on your income, often referred to as the marginal tax rate. But that doesn’t mean your effective tax bracket would fall into that same tax rate.
When you need to prepare your taxes in 2019, you need to refer to the 2018 tax brackets. Right now, tax brackets fall into seven levels or segments: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.
For instance, a hypothetical single taxpayer earning $50,000 in taxable income would fall into the 22% marginal tax rate. But when his taxes are computed, the first portion of his salary, from $9,525 to $38,699 would be taxed at 10%. The following amount would then be charged 22% of tax. Doing the math, the overall taxes this person needs to pay is $6,900, which translates to only 14% of his taxable income, not 22% where his tax bracket falls.
How can I get into a lower bracket?
It can be challenging to move into a lower tax bracket if you’re earning more money. If you want to pay only 10% in taxes from your taxable income, the best way is to keep your income less than $9,075. But who wouldn’t want to earn more money, right?
Fortunately, there’s a couple of ways to get into a lower tax bracket. These are legal cheats that can help you minimize your tax rates while enjoying a decent income.
Fund your retirement
Retirement contributions are deducted from your taxable income. If you put more money towards your retirement plan, your income is reduced, and in essence, you fall into lower tax brackets.
But the good thing about this strategy is that you don’t lose the money just to pay less in taxes. Instead, you’re diverting it into a fund that you can use later on in your golden years. So, if you’re paying 28% in taxes right now that you’re working, for instance, the scenario changes when you retire because you lose the paycheck. After retirement, it’s possible to pay 15% or less in taxes.
Contribute to charity
Giving to charity out of generosity and good faith is good, but what’s even better is that IRS rewards you for sharing some of your blessings by donating to a qualified charity. But there are a few key tricks to go about this. First, you must go the itemized deduction route to make the donation count as a deductible. And second, opt to donate when you deem the tax year will place you at a higher tax bracket. For instance, if you’re at 33% tax bracket this year, you can save more in deductions that if you would donate at a time when you’re in a 25% tax bracket.
Sure, it doesn’t make sense to get married for the sake of saving money on taxes alone, but if you’ve been contemplating the idea of tying the knot, now might be a good time to do so. Did you know that you can fall into a lower tax bracket if you get married and change your filing status to “filing jointly?” This is especially advantageous if one spouse isn’t working or if he or she earns significantly lesser than the other.
Bulk your business expenses
Business expenses are deductibles as well. If you time most of your business expenses at the end of the year, you’ll enjoy more significant deductions, and lower taxes come tax season.
For instance, instead of paying for business equipment amounting to $5,000 at the beginning of the year, it makes more sense to do this at the end of the year and spend $15,000 to $20,000. This way, you’ll reduce taxable income, you go lower in the tax bracket, and in effect, pay less in taxes. It’s probably one of the reasons why most employers give employees end-of-the-year bonuses (instead of at the start of the year). Apart from sending the holiday cheer, they also save more money in taxes.
These are just some of the easiest and most accessible ways to bring your tax bracket down. However, it is worth remembering that you’re better earning and then pay tax at a slightly higher rate, than settle for lower income just to save money on taxes.
What’s the alternative minimum tax?
In 1969, the US Congress passed a law that mandates the rich and elite to pay their fair share of taxes. Its history goes back to the time when 155 individuals were able to dodge their tax duties by using so many deductions and tax breaks. The congress noticed that trick, and it’s eluding the country with rightful federal taxes, so they instituted the tax code which we now come to know as the Alternative Minimum Tax or AMT.
AMT operates alongside the regular tax rate. But the difference is that people who are earning more than the exemption and then use deductions to reduce what they owe the government in taxes. That means that these people need to calculate their taxes twice: first using the regular tax rate, and second using the AMT. If the IRS founds out that you qualify for AMT, you need to pay the difference.
In 2018, the exemption amount for AMT was $70, 300 for single filers, while those who are filing jointly, it is $109,400. It is also important to note that in AMT, several personal exemptions and deductions do not count when they would for regular tax filing, including but not limited to real estate and personal property taxes, foreign tax credits, business expenses and more.
You don’t have to sweat over AMT unless you’re earning more than the stipulated exemption. It used to affect more affluent people (it was, after all, dubbed as the “millionaire’s tax), but now, it affects numerous tax-paying citizens. On the upside, AMT has helped the government collect around $60 billion in federal taxes.
List of tax credits / deductions / exclusions
Everybody’s looking to save some money, including in taxes. For this reason, it is essential to know which tax credits, deductions, and exclusions that may qualify for so that you can reduce your taxes and save more money into your pocket. Here’s a list of the possible tax credit, deductions, and exemptions that you may take advantage of.
Standard and personal exemption
Standard and personal tax exemptions refer to the amount that a taxpayer may claim as deduction against his or her taxable income. As of 2018, the standard personal tax exemption of $4,050 has been abolished while the standard tax deductions have been doubled.
There’s a variety of tax exemptions that you can legally claim to bring down your taxes. For instance, in personal exemptions, you can declare your spouse as a tax exemption if you’re filing jointly. Additionally, you can claim yourself as tax-exempt if no other taxpayer claims you for an exemption.
You may also take advantage of the dependent exemption for children and family members who live with you and are 17 years old and younger. According to the IRS, how much you get for exemption depends on a case to case basis. In 2018, the personal and tax exemptions is at $4050 per one exemption or dependent.
Child tax credits
Child tax credits are credits that you can claim if you’re currently raising children and living with dependents in the household who are 17 years old or younger. The goal of the credit is to help parents boost their income by giving them $2000 credit for each child or dependent.
As child tax credits are directly subtracted from your total tax bill, claiming child tax credits can indeed help parents save money. Some new changes were rolled out relating to child tax credits recently, including refundable credit of up $1,400 (previously this refund feature was not available) and the household must have an earned income of $2,500.
To qualify for child tax credit, the child or dependent must be a minor (17 years old and below); must be a family member (son, daughter, step child, niece, nephew or grandchild) and have lived under your roof for at least six months, among other things.
Raising children can be costly, and it is for this reason that the government is offering child tax credits for qualifying parents and guardians. And since it has been made refundable, there’s a chance to claim the credits later on.
Earned income tax credit
The earned income credit (EIC) is a kind of tax credit many low to mid-income families can take advantage of. To be eligible for this tax credit, you must have earned at a dollar as earned income, excluding unemployment and pensions. Your investments must not be more than $3,500.
How much you earn on EIC can range from $519 to $54, 884 as of 2018. Generally, the lesser you earn and the more children you have, the more you get in credits. But if you don’t have kids, you may still be eligible for EIC if you are 25 years old and not more than 65 years old on that tax year, you’re a US resident for at least a year, and no other taxpayer has claimed you as a dependent.
Annual gift exclusion
Many people don’t give gift tax that much thought, unless if it amounts to something significant. And this is where the annual gift exclusion comes in.
The annual gift exclusion is a benefit that favors gift givers. According to this law, you can give people, family or non-family gifts of less than $15,000 (cash or otherwise) and you wouldn’t have to disclose it to the IRS. However, if you’ve given more than $15,000, then you must indicate it on your tax returns.
Then there’s the matter of lifetime gift exclusion. According to the IRS, the lifetime gift exclusion for 2019 is at $11.4 million. If you do, then you need to report that to the IRS.
If you’re quite the generous type of person, it is essential that giving too much can trigger some nasty paperwork with the IRS. For instance, if grandparents decided to put in more than $15,000 into their grandchildren’s 529 accounts, then they trigger a tax return.
Additionally, doing a gift tax return may be the last thing on your mind when you're just helpful or generous. If you paid for your child’s wedding or honeymoon as gifts, then expect to do some paperwork.
But not all gifts require a tax return. Gifting to your spouse, IRS-approved charities and paying for another person’s medical bills or tuition (as long as payments are made out directly to the school or facility), are exempted from the gift tax.
Navigating through taxes can be overwhelming, but it’s necessary. There are so many things to deal with, including tax brackets, alternative minimum amounts and even which deductions and credits that may apply to you. But at the end of the day, you're just being a responsible citizen, and you’re doing your part to the government properly. The best that you can do is to do your due diligence to try to save as much money as you can from taxes.
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