| Applying 2023 Tax Brackets and Rates to an Individual Earning $80,000 | |||
|---|---|---|---|
| Dollars | Amount Subject to Tax | Tax Rate | Tax at Each Rate |
| $0~$11,000 | $11,000 | 10% | $1,100 |
| $11,000 to $44,725 | $33,725 | 12% | $4,047 |
| $44,725 to $95,375 | $35,275 | 22% | $7,761 |
| Total | $80,000 | - | $12,908 total tax bill |
Because of the varying tax brackets, a taxpayer will usually have an effective tax rate different from their highest tax bracket. The marginal tax rate is the additional tax paid for every extra dollar of income. For example, a 10% marginal tax rate means that $.10 of every next dollar earned will be taken as tax.
However, note that while the marginal rate is 22%, the effective tax rate is 16.1%. This figure is arrived at by dividing the total tax bill ($12,908) by income ($80,000) and multiplying by 100. The effective tax rate is the actual rate the individual ends up paying in taxes to the government.
How To Reduce Your Taxes: Tax Deductions
There are two ways to pay less tax: make less money or earn more tax benefits. As it’s usually more advantageous to seek out tax benefits, there are several specific places taxpayers can look.
Tax deductions are legislative enactments that allow a taxpayer to reduce the amount of income they are taxed on their return. Though tax deductions don’t directly reduce the amount of tax a taxpayer must pay, it does reduce the calculation basis for the taxpayer’s tax liability.
For example, consider a taxpayer who contributes to a traditional IRA. In many situations, the taxpayer is allowed to deduct their contribution from their taxable income. Should the taxpayer have contributed the 2023 maximum amount, their taxable income would be reduced by $6,500. If the taxpayer is in the 22% marginal tax bracket, this would result in a potential $1,430 ($6,500 * 22%) tax savings.
Examples of Tax Deductions
The most common Federal tax deduction used to reduce your Federal income tax liability is the standard deduction. Each taxpayer may claim a standard deduction based on their filing status; this amount (which is reassessed annually) allows a taxpayer to reduce their taxable income by a set amount established by the Federal government.
The alternative to a standard deduction is the itemized deduction. This option allows taxpayers to accumulate certain types of eligible expenses and opt to deduct the total allowable amount of these expenses instead of the standard deduction. These types of expenses include charitable contributions, mortgage interest payments, and medical expenses.
Last, there are deductions exclusive of the standard deduction or itemized deduction. For example, as long as taxpayers meet specific contribution and income limit thresholds, certain types of retirement contributions may be deducted. Alternatively, taxpayers may receive deductions on other types of spending such as educational expenses.
How To Reduce Your Taxes: Tax Credits
Tax credits are legislative enactments that allow a taxpayer to reduce the amount of tax they owe. After a taxpayer’s tax liability is calculated, a taxpayer may then directly reduce their liability by tax credit amounts they are eligible for.
Take a taxpayer who has one child and is eligible for the Child Tax Credit. The taxpayer’s taxable income is $50,000, and the taxpayer’s tax liability is $4,500. The Child Tax Credit directly reduces the tax liability from $4,500 to $2,900. The Child Tax Credit is not applied to the $50,000 of taxable income; instead, it is directly applied to the tax liability amount.
The largest tax credits are all associated with legislative incentive endeavors for specific types of taxpayers. For example, the Earned Income Tax Credit awards tax credits to those of low income, while the American Opportunity Tax Credit and Lifetime Learning Credit award those pursuing higher education. The Child and Dependent Care Credit benefits those with children/dependents.
Refundable vs. Nonrefundable Tax Credits
Some Federal tax credits are nonrefundable, meaning once they reduce your tax liability to $0, a taxpayer may not receive additional benefit nor receive a refund due to an unused portion of the credit. An example of a nonrefundable tax credit is the Adoption Tax Credit; once the credit reduces a taxpayer's tax liability to $0, the taxpayer will simply not pay tax.
On the other hand, other credits may be refundable; not only can refundable tax credits reduce a taxpayer's liability to $0, but they may flip the taxpayer into receiving a tax refund. For example, if you owe $750 in taxes but qualify for a $1,000 refundable tax credit, you would ultimately receive a $250 tax refund.
Be mindful that some credits are partially refundable. For example, in 2023, the Child Tax Credit of $1,600 is partially refundable; in 2024, up to $1,700 is refundable.
State Income Tax vs. Federal Income Tax
It is important to distinguish between the definition of income tax and federal income tax. In the U.S., governments at the state level may also levy income taxes in addition to federal income taxes.
Not all states have state-level income taxes. As of 2023, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyomingdon’t have an income tax.
New Hampshire taxes dividends and interest income only, but the state will completely phase out these taxes by 2027.
Individual vs. Other Federal Income Taxes
The information above has been primarily informative regarding individual Federal income taxes. The IRS also collects tax revenue from other entities.
Businesses must report income and receive tax benefits similar to individuals. Certain legal business forms, such as partnerships, have a different tax filing date compared to individual filers. In addition, businesses are subject to a wide range of tax credits only available to businesses; many credits derive from the General Business Credit filed using Form 3800.
Charities and nonprofits that have received tax-exempt status must also usually file a Form 990 with the IRS to maintain their tax-free status. This information return does not result in any taxes owed from the nonprofit. However, information provided on the return may result in further evaluation or revocation of the tax-advantaged status.
Last, international individuals or businesses may be required to file Federal taxes within the U.S. There are specific rules for foreign entities with income-generating activities within the United States and domestic entities with income-generating activities outside the United States.
What Are the Federal Income Tax Brackets for 2023 and 2024?
The U.S. federal income tax is a marginal tax rate system based on an individual's income and filing status. For the 2023 and 2024 tax years, the tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Does Social Security Count as Income?
Social Security benefits are not counted as gross income. However, benefits are included in your combined income, which the IRS uses to determine if you should pay taxes on your benefits. Combined income is determined by totaling your adjusted gross income (AGI), nontaxable interest, and half of your Social Security benefits. If your combined income is between $25,000 and $34,000, you may be taxed on up to 50% of your benefits. If your combined income is more than $34,000, you may be taxed on up to 85% of your benefits.
Which Country Has the Highest Federal Income Tax?
Ivory Coast has the highest tax rate at 60%. Finland (56.95%), Denmark (56%), Japan (55.97%), Austria (55%), Sweden (52.3%), Aruba (52%), Belgium (50%), Israel (50%), and the Netherlands (49.5%) round out the top 10 as of 2023.
Which U.S. President Imposed the First Federal Income Tax?
President Abraham Lincoln was the president to impose the first federal income tax by signing the Revenue Act on Aug. 5, 1861. The reason he did so was to finance the Civil War. A 3% tax was imposed on all annual incomes over $800.
When Is Federal Income Tax Due?
Generally, federal income tax is due on April 15 of every year. The day can shift slightly if April 15 falls on a weekend or because of other factors.
The Bottom Line
Federal income taxes are considered a marginal tax or progressive tax and apply to all forms of earnings that make up a taxpayer's taxable income, including wages, salaries, commissions, bonuses, tips, investment income, and certain types of unearned income. Each year, the IRS releases updates to the tax brackets and rates that apply to single filers, married individuals filing joint returns or separately, and heads of households.
As an expert in taxation with a deep understanding of the concepts involved, let me delve into the details of the article "Applying 2023 Tax Brackets and Rates to an Individual Earning $80,000."
Firstly, the article discusses the progressive nature of the U.S. federal income tax system, which is divided into different tax brackets with corresponding rates. In the given example, an individual with an income of $80,000 falls into three tax brackets:
- $0 to $11,000 at a tax rate of 10%
- $11,000 to $44,725 at a tax rate of 12%
- $44,725 to $95,375 at a tax rate of 22%
The article calculates the tax at each rate and provides a total tax bill of $12,908 for the $80,000 income. It also highlights the difference between marginal tax rate (the additional tax paid for every extra dollar of income) and effective tax rate (the actual rate the individual ends up paying in taxes). In this case, the marginal tax rate is 22%, while the effective tax rate is 16.1%.
To mitigate tax liability, the article suggests exploring two strategies: making less money or earning more tax benefits. It then introduces the concept of tax deductions, which reduce the amount of income taxed. A practical example is given where contributing to a traditional IRA allows a taxpayer to deduct the contribution from their taxable income, potentially resulting in tax savings based on the individual's marginal tax rate.
Furthermore, the article explains the difference between standard and itemized deductions, providing examples of expenses eligible for itemized deductions, such as charitable contributions, mortgage interest payments, and medical expenses. It also mentions deductions exclusive of standard or itemized deductions, such as certain retirement contributions and educational expenses.
Moving on to tax credits, the article defines them as legislative enactments that directly reduce the amount of tax owed. Various examples of tax credits are discussed, including the Child Tax Credit, Earned Income Tax Credit, American Opportunity Tax Credit, Lifetime Learning Credit, and the Child and Dependent Care Credit. The distinction between refundable and nonrefundable tax credits is explained, with examples to illustrate how they impact tax liability and potential refunds.
The article also touches upon state income tax versus federal income tax, highlighting that not all states impose income taxes. It mentions specific states without income taxes and notes the phased-out taxes in New Hampshire by 2027.
Expanding beyond individual federal income taxes, the article briefly mentions that businesses, charities, nonprofits, and international entities also have tax obligations. It outlines the different filing requirements and forms associated with these entities.
Lastly, the article concludes with additional information on the U.S. federal income tax brackets for 2023 and 2024, addresses the treatment of Social Security benefits, provides global perspectives on the highest federal income tax rates, and offers historical context on the initiation of federal income tax by President Abraham Lincoln during the Civil War. It also mentions the general deadline for federal income tax, usually on April 15 of every year.
In summary, the article provides a comprehensive overview of individual federal income taxation, covering tax brackets, deductions, credits, state income taxes, and broader taxation aspects.
