It might seem the IRS randomly assigns our tax brackets, but the agency actually use a very straightforward method to calculate your tax bracket. Understanding your tax bracket will help you to better prepare for tax day and to learn ways to reduce your overall tax liability for the future.
Factors That Influence Your Tax Bracket
Your tax rate is based on several parts of your tax scenario, including your filing status, number of dependents, your gross income, and eligible tax deductions. You have the option of choosing from one of the five tax filing statuses: Single, Married Filing Jointly, Marred Filing Separately, Head of Household and Qualifying Widow(er). Each status carries a specific standard deduction amount, which can reduce your taxable income. Your tax rate is also influenced by the number of exemptions you can claim.
In addition, there is an exemption amount for each eligible dependent claimed on your taxes each year.
Your tax bracket is also influenced by your gross income and allowable deductions. The IRS takes your gross income and subtracts your eligible deductions to arrive at your taxable income for that year. Your tax rate will be based on the remaining amount of income after subtracting your deductions.
Figuring Your Tax Bracket
OK, on to the math:
1. Total your gross income from all sources: earnings, self-employment income, interest, dividends, and capital gains.
2. Subtract your eligible deductions, starting with the standard deduction for your filing status. You can find this number in IRS Publication 17 (Note: not yet available for 2015 tax year). Be sure to include your eligible dependents in this figure.
3. Deduct the number of exemptions you can claim: be sure to include yourself and your spouse if you’re filing a joint return.
4. Refer to the “Adjustments to Income” section of the IRS Form 1040 to find which deductions you may qualify for, e.g., student loan interest, moving expenses, self-employment tax, educator expenses, and so on.
5. Subtract all of these deductions from your income. The final number is your taxable income, or the amount that is subject to federal income tax.
Once you have this figure, you can refer to the IRS tax tables to determine your tax bracket. You can find the tax tables in IRS Publication 17 or in the instruction booklet for Form 1040. The tables will have both the tax rate percentage and the dollar amount of tax you’ll owe for that year.
Even if you are going to have your taxes prepared and filed by a tax pro or VITA volunteer, it’s a good idea to know your tax bracket in advance.This is especially true if you’ve had a large income increase such as a raise or sizable bonus. You can get an idea as to how much you’ll owe in taxes and how you can reduce your future tax liability.