One of the most common questions we get is, “What income is taxed, and how?” It’s a great question and one that has a lot of nuance to it. So, in this article, we’ll break down the types of income that are taxable and provide an overview of how the tax process works.
First things first: what is taxable income? Put simply, taxable income is any money that you earn that is subject to federal, state, and local income taxes. This includes:
Now that we know what income is taxable, let’s talk about how it gets taxed. The US tax system is a progressive system, which means that the more money you make, the higher your tax rate. The system is divided into tax brackets, which are groups of income levels that are taxed at different rates. Here are the 2022 federal tax brackets for single filers:
So, let’s say you’re a single filer with a taxable income of $50,000. The first $10,275 of that income is taxed at a rate of 10%, which comes out to $1,028. The next $32,625 is taxed at a rate of 12%, which comes out to $3,915. Finally, the remaining $7,100 is taxed at a rate of 22%, which comes out to $1,562. In total, you would owe $6,505 in federal income taxes.
Of course, the federal tax system is just one piece of the puzzle. Depending on where you live, you may also owe state and local income taxes. These taxes work in a similar way to federal taxes, with different tax brackets and rates based on your income. For example, in California, the state income tax system has nine brackets, with rates ranging from 1% to 13.3%.
It’s worth noting that not all income is taxed equally. Some types of income are taxed at a lower rate or not at all. Here are a few examples:
It’s also worth noting that there are various deductions and credits available that can reduce your taxable income or lower your tax bill. Here are a few examples:
So, that’s a brief overview of what income is taxed and how. Of course, the tax system is much more complex than we can cover in a single article, and many factors can impact your tax liability. Here are a few additional tips to keep in mind:
Understanding what income is taxable and how it gets taxed is an important part of being a responsible taxpayer. By staying informed and keeping good records, you can help ensure that you’re paying the right amount of taxes and taking advantage of all the deductions and credits available to you. And if you’re ever unsure about how to navigate the tax system, don’t hesitate to reach out to a tax professional for guidance.
It’s also important to note that while paying taxes may not be the most enjoyable task, it’s a necessary part of contributing to the functioning of our society. Taxes fund important programs and services like education, healthcare, and infrastructure, and by paying our fair share, we’re helping to build a better future for ourselves and our communities.
In summary, here’s a quick recap of what we’ve covered:
By understanding what income is taxable and how it’s taxed, you can help ensure that you’re fulfilling your tax obligations while minimizing your tax liability. So whether you’re a seasoned taxpayer or just starting, it’s always a good idea to stay informed and educated about the tax system.
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