Financial Education Series
Income Tax Basics
Understanding How Your Taxes Work
Understanding the fundamentals of income taxes helps you make informed financial decisions, plan effectively for your tax obligations, and potentially reduce your tax burden through legitimate strategies.
Why This Matters
Taxes represent one of your largest lifetime expenses. Knowledge of how the tax system works can help you keep more of your hard-earned money while staying compliant with tax laws.
Tax Brackets and Progressive Taxation
How Tax Brackets Work
The U.S. uses a progressive tax system where different portions of your income are taxed at increasing rates. Common misconception: moving into a higher tax bracket does not mean all your income is taxed at that higher rate.
| 2024 Tax Bracket | Single Filers | Married Filing Jointly |
|---|---|---|
| 10% | $0 to $11,600 | $0 to $23,200 |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 |
| 22% | $47,151 to $100,525 | $94,301 to $201,050 |
| 24% | $100,526 to $191,950 | $201,051 to $383,900 |
| 32% | $191,951 to $243,725 | $383,901 to $487,450 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 |
| 37% | $609,351 or more | $731,201 or more |
Example: $60,000 Income (Single Filer)
First $11,600: Taxed at 10% = $1,160
$11,601 to $47,150 ($35,550): Taxed at 12% = $4,266
$47,151 to $60,000 ($12,850): Taxed at 22% = $2,827
Total federal income tax: $8,253 (13.8% effective tax rate)
Deductions vs. Credits
Tax Deductions
How Deductions Work
Deductions reduce your taxable income before tax rates are applied. Their value depends on your tax bracket.
Standard Deduction (2024)
Single: $14,600
Married Filing Jointly: $29,200
Head of Household: $21,900
Common Itemized Deductions
- • Mortgage interest
- • State and local taxes (up to $10,000)
- • Charitable donations
- • Medical expenses (above 7.5% of AGI)
Tax Credits
How Credits Work
Credits directly reduce your tax bill dollar-for-dollar after tax rates are applied. More valuable than deductions of the same amount.
Refundable vs. Non-Refundable
Refundable credits can result in a tax refund even if you owe no tax.
Non-refundable credits can reduce your tax to zero but won't be refunded beyond that.
Common Tax Credits
- • Child Tax Credit
- • Earned Income Tax Credit (EITC)
- • American Opportunity Credit (education)
- • Lifetime Learning Credit
- • Retirement Savings Contributions Credit
Key Tax Concepts
Important Terminology
Gross Income vs. Adjusted Gross Income (AGI)
Gross Income: All income from all sources.
AGI: Gross income minus certain adjustments like student loan interest, retirement contributions, and health savings account contributions. Many tax benefits phase out based on AGI.
Taxable Income
AGI minus either the standard deduction or itemized deductions. This is the amount to which tax rates are applied to calculate your tax liability.
Marginal vs. Effective Tax Rate
Marginal Tax Rate: The tax rate applied to your last dollar of income.
Effective Tax Rate: Your total tax divided by your total income, representing the average rate at which your income is taxed.
Withholding and Estimated Taxes
The U.S. has a pay-as-you-go tax system. Taxes must be paid throughout the year either through employer withholding or quarterly estimated tax payments for self-employed individuals or those with significant non-wage income.
Tax Reduction Strategies
Legal Tax Minimization
Retirement Accounts
Tax-Advantaged Accounts
Income Timing and Tax-Loss Harvesting
This content is educational in nature and updated as of March 2024. Tax laws change frequently, and this information may not reflect the most current tax regulations. For complete information about our services, please review our Terms of Service.