Ashley Hanson

The 2020 Tax Brackets are Out — Here’s What They Mean Photo by​ ​TJ Dragotta​ on​ ​Unsplash Death and taxes. These are two certainties in life. When it comes to getting a good understanding of how they work, uncertainty is normal. Earlier in November, the IRS released their annual tax code updates for 2020. This includes higher income limits on the tax brackets to help account for inflation. These changes influence how much you pay when you file your taxes in 2021. Take a look at how these changes will affect your tax bill this year. 2020 — Tax Brackets Head of Household: ● ● ● ● ● ● ● 10% — Any income up to $14,100 12% — Income between $14,101 to $53,700 22% — Income between $53,701 to $85,500 24% — Income between $85,501 to $163,300 32% — Income between $163,301 to $207,350 35% — Income between $207,351 to $518,400 37% — Any income up to $518,400 Single ● ● ● ● ● ● ● 10% — Any income up to $9,875 12% — Income between $9,876 to $40,125 22% — Income between $40,126 to $85,525 24% — Income between $85,526 to $163,300 32% — Income between $163,301 to $207,350 35% — Income between $207,351 to $518,400 37% — Any income above $518,400 Married — Filing Jointly: ● ● ● ● ● ● ● 10% — Any income up to $19,750 12% — Income between $19,751 to $80,250 22% — Income between $80,251 to $171,050 24% — Income between $171,051 to $326,600 32% — Income between $326,601 to $414,700 35% — Income between $414,701 to $622,050 37% — Any income above $622,050 Married — Filing Separately: ● ● ● ● ● ● ● 10% — Any income up to $9,875 12% — Income between $9,876 to $40,125 22% — Income between $40,126 to $85,525 24% — Income between $85,526 to $163,300 32% — Income between $163,301 to $207,350 35% — Income between $207,351 to $311,02 37% — Any income above$311,025 Decoding 2020 Tax Brackets Unfortunately, taxes are not the most straightforward things in the world. Lots of people have confusion over how the IRS taxes them according to their tax brackets. For example, if you earn $70,000 and you’re single, you might think it’s as simple as getting taxed at 22%. But, it’s not that simple. The U.S. has a progressive tax system in place. As your income goes up, your tax rates go up. The only income that falls inside a certain tax bracket’s range gets taxed at that rate. The tax brackets only apply to any taxable income. This is what you get left after you subtract your itemized or standard deductions. For example, you have $55,000 in taxable income left after you subtract all of your deductions. If you follow the tax brackets, $9,875 of that $55,000 gets taxed at 10%. You’ll end up paying $987.50 on that. The next thing the IRS taxes is $30,250 of your $55,000 income. This is the income that falls between $9,876 and $40,125. This $30,250 has a tax rate of 12%, so you’ll pay $3,630 on that income. The $14,875 that is left or the income above the $40,125 range gets a 22% tax rate. You’ll pay $3,272.50. If you add them all up, you’ll get the total amount you owe this year. $987.50 + $3,630 + $3,272.50 = $7,890 Effective Tax Rate vs. Marginal Tax Rate In order to get a better understanding of how the different tax brackets impact your taxes, there are a few things to know. The effective tax rate is the average tax amount you pay on all of your annual income. So, if you had a $55,000 income and you paid $7,890 to the IRS, you’d have an effective tax rate of 14.3%. So, if your income pushes you into the 22% tax bracket, you won’t necessarily pay 22% of your income taxes. The marginal tax rate is the highest tax rate you pay. If you look at the example above, when you have an income amount of $55,000, the highest rate you pay is 22%. It’s essential that you figure out where you are in terms of your effective tax and marginal tax rate, especially as a freelancer. You’ll have to know how much to save over the year, so you don’t scramble come April’s deadline.