Taxes 101: How Your Taxes Are Determined

Knowing how your taxes are determined can help you understand the process a bit better and even help you save.
So how are your taxes determined?
How much tax you pay is determined by how much you make. The federal government uses a progressive tax system, which means that the more money you make, the higher your effective tax rate is. These rates are determined by tax brackets. For instance, if you make between $91,900 and $191,650, you’re in the 28 percent tax bracket. However, only the portion of your income above $91,900 will be charged at that 28 percent rate. Thus, contrary to popular belief, getting a raise that moves you into a higher tax bracket does not mean that you wind up bringing home less money!
If you have a regular job, your employer will give you a form called a W-2; this includes information on how much they paid you, and how much has already been deducted in taxes by the company. This information is then transferred to your tax return and is the main method for determining how much you owe—or are owed—in taxes. Self-employed people and contractors use similar forms called 1099s, and other forms may be issued to you from banks and investment firms where you’ve accumulated interest income. The income information here is all transferred to your 1040.
However, the amount of your income that’s actually taxable can be reduced by what’s known as deductions. For instance, if you gave $2,000 to qualifying charities and non-profits in 2018, you can deduct that when you do your taxes in spring 2019. (Note that this doesn’t mean that your total tax bill gets reduced by $2,000, but rather that the income figure used to determine your tax bill is lowered by this much—which, in turn, lowers your effective tax rate by some amount.)

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