First Federal Bank of Kansas City does not provide legal, tax or accounting advice. We recommend contacting your tax advisor for more information.
How your tax bracket and filing status impacts your return
Income taxes are a key requirement in your financial life. Understanding tax terms and withholding strategies can help you make better decisions, ensuring you pay no more than you owe or you get back the refund you deserve. Here’s an overview of the basics.
What is income tax?
Income tax is a tax imposed on what you earn. It is levied by the federal government, most states, and even some local governments. Taxes are a significant source of revenue for governments, and that revenue funds government programs and services, everything from national defense to unemployment benefits.
What is your taxable income?
Your taxable income is the amount of income that is subject to tax after deductions and credits are applied. It's important to accurately calculate your taxable income to ensure you pay the correct amount of tax.
There are several types of income, including:
- Earned income – wages, salaries, and tips
- Passive income – interest and dividends
- Capital gains – profits from the sale of assets
Each type of income is treated differently for tax purposes, with some types taxed at higher rates than others.
What is the filing status?
Your filing status affects how much tax you owe and what deductions and credits you're eligible for. Filing statuses include:
- Single
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er) with dependent child
Your filing status is determined by your marital status and living situation as of the last day of the tax year.
What are tax brackets?
Tax brackets determine the rate at which your income is taxed – from 10% to as much as 37%. The tax system is progressive, meaning that as your income increases, so does the tax rate. Tax brackets are adjusted annually for inflation, so it's important to be aware of the current rates when filing your taxes. Here’s a list of the federal income tax rates and brackets from the Internal Revenue Service (IRS).
How is income tax collected?
When you are hired, you fill out a Form W-4 that estimates how much your employer should withhold from your pay for taxes. Your employer then automatically withholds that money from each paycheck and sends it to the IRS. You’ll receive a Form W-2 at the end of the year that lists your wages as well as all the taxes withheld from your paycheck over the year.
There is no automatic withholding or a W-2 if you’re self-employed. You are expected to pay estimated taxes to the IRS four times per year on the income you earn. This also applies to any non-wage income.
What are deductions and credits?
Deductions and credits are both valuable but a bit different. A deduction lessens the amount of income that will be taxed. A tax credit directly reduces the amount of tax you pay.
Common deductions include things like qualified retirement account contributions, mortgage interest, medical expenses, and charitable contributions. Credits include things such as the child tax credit and earned income tax credit.
What else should you know about filing your taxes?
- You can use paper or electronic filing when it comes time to submit your tax return. Electronic filing is the most common method and is often faster and more convenient.
- If you’re working on your return and discover that you overpaid, the IRS will send you a refund. While getting money back is nice, you might consider adjusting your tax withholding if you consistently receive refunds every year. That way, more of your earned income is available in each paycheck instead of letting the government hold on to your money all year interest-free. You can adjust your withholding by filling out a new W-4. Typically, your Human Resources department can help you with this.
- If you end up owing more tax than you paid throughout the year, you will need to make a payment when you file your return. You can pay by check, electronic payment, or credit card.
- The deadline for filing your federal income tax return is usually April 15, although this date can vary slightly depending on the year and any extensions granted by the IRS. It's important to file your taxes on time to avoid penalties and interest on any taxes owed.
Understanding the basics of income tax can help you better manage your financial life and make informed decisions. If you have questions about your taxes, don't hesitate to seek professional advice to ensure you're complying with the tax laws and maximizing your tax benefits.
