Determining your taxable income and your tax bracket is important because you need to know what to anticipate when it comes time to file your income taxes for the year. You will also need to know where you stand so you can make better informed decisions about how to reduce your taxable income responsibilities such as through contributing to a 401k or an IRA account for retirement.
In order to determine your taxable income, you cannot go by your annual salary. Rather, you will need to calculate the amount of income that remains after your retirement contributions are made. You will also need to deduct the amount of eligible deductions permitted by the IRS to get a more accurate estimate.
Many times you can use your previous income tax return to get an estimate but if you have been making substantially more money or have received bonuses at work, a new figure may have to be calculated.
Understanding Your Tax Bracket
Tax brackets are ranges of income levels which will be affected by several factors each year including inflation changes. Tax brackets can change on an annual basis. They may also change based on how you file your taxes such as married or as a single individual.
Since tax rates may change each year, you will need to follow up with the Internal Revenue Service to define them for the year in which you are filing returns. The first few thousand dollars of your income will be taxed at one rate. The next range of your income is taxed at a different rate and so on. The highest tax rate your income incurs is referred to as your marginal tax rate.
The Essentials of Tax Bracket History
Tax bracket categories are part of what is known as a progressive income tax system. This means that taxes will continue to increase along with the income. Those that earn a high income will pay more in tax responsibilities. Those that earn low wages will pay less tax on income because it is what they can reasonably afford.
Income tax was established in 1861 when the Union needed assistance to raise funds for Civil War supplies. At that time, any income above $800 was taxed at a 3% rate. The development of tax brackets began a year later. The highest tax bracket charged a 5 percent tax rate for income earners making over $10,000. The lower bracket charged 3 percent for incomes up to $10,000. This taxation method was rescinded in 1872 after the war efforts no longer needed funding.
In the 1890’s, the government had the power given by the US Constitution to institute income taxes based on the population of each state but it was soon abolished because the US Supreme Court deemed it unconstitutional. In 1913, the government was once again given the power to institute a tax but population no longer mattered. This was the beginning of the current income tax system still being used in the United States.
Throughout history, tax rates on income have been cut when the economy had been in a good place and thriving. When the Great Depression and World War II occurred, the tax rates went up again to increase funding to the federal government. In 1944, the lowest rate during WWII was 23 percent while the highest tax rate was a staggering 94 percent for those earning $200,000 or more.
Starting in the 1980’s, tax cut actions by the government changed the number of tax brackets. In 1986, there were a total of 15 tax brackets but two years later in 1987 there were only five brackets. Financial experts at the time brought up the point that too-high tax rates would likely keep people from working. The subsequent tax cuts were implemented in the same decade in order to stimulate economic growth. Ever since the 80’s, the tax rates have been going up and down but for the most part, little change has come to this part of the tax process.