Everyone has to pay a tax on income they earn to help pay for federal government expenses. Income tax rates can be as low as ten percent for people on the low end of the income scale. Tax rates go up to about 36 percent for people who earn hundreds of thousands of dollars a year. A single taxpayer will be taxed for every dollar earned in a certain tax bracket. Money you earn above this level is taxed at the higher rate.
Everyone is allowed to earn a certain amount of money tax-free. This is your personal tax exemption. Even if you earn less than your exemption you may still want to file a tax return, you may receive a refund for tax credits. Tax credits come directly off the taxes owed. Make sure to see if you are eligible for tax credits such as the child tax credit, or the earned income tax credit.
Your personal situation will also affect the amount of tax you pay. Tax rates differ for people who are single, or married. The type of income you earn may also affect your tax rate. Your gross income is all of the money you earn from all sources. There are certain exclusions. For example, the government has decided that employer paid health insurance will not be taxed.
You can also earn income as a self-employed contractor, through investments, and through the sale of property. If you make money selling an investment property, or stock shares, this is referred to as capital gains. If you sell the property in less than a year, this is called short-term capital gains. This is subject to the same tax rate as ordinary income. There are separate tax rates for money made through certain real estate transactions, collectibles, or small business.
You can lower your tax rate through exclusions and deductions that are taken off the top of your gross pay. Deductions can include medical expenses, alimony, moving expenses, charitable contributions, alimony, business deductions, and dependents. As your income level increases, certain deductions are reduced or eliminated. Your tax package, and federal tax forms, will outline this year's tax rates for you.