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6 Factors That Affect How Much Income Tax You Pay

6 Factors That Affect How Much Income Tax You Pay

We all know that the salary we negotiate is not the same as our take-home pay. Between benefits, retirement contributions and taxes, the difference can be quite substantial. In the U.S., federal and often state and local governments collect income taxes. Understanding which factors affect how much income tax you have to pay at every level can help you make more informed decisions. For tax planning, you can work with a financial advisor who can help you prepare for potential liability and who might be able to save you some money. 

How Income Taxes Work

In the U.S., income taxes are paid by citizens depending on what their adjusted gross income (AGI) is after certain deductions or credits. AGI is calculated through the rules set out by the IRS on the federal level or the state’s revenue department (in most cases) at the state level. Some states do not have an income tax at that level and those that live in one of those states only pay income taxes at the federal level.

Each income tax obligation is calculated by what income bracket the taxpayer falls into. For some, their income bracket is determined by their individual AGI but married persons who file jointly will factor in all income for both parties. The married tax bracket is typically much higher for each bracket than the single filers in order to balance out the tax obligations.

Federal Income Tax Brackets

As stated above, your tax obligation is going to depend on what tax bracket you fall into after your adjusted gross income is calculated. Here are the tax brackets for 2022:

Federal Income Tax Bracket for 2022 (filing deadline: April 17, 2023)

SingleMarried Filing JointlyMarried Filing SeparatelyHead of Household
10%$0 – $10,275$0 – $20,550$0 – $10,275$0 – $14,650
12%$10,276 – $41,775$20,551 – $83,550$10,276 – $41,775$14,651 – $55,900
22%$41,776 – $89,075$83,551 – $178,150$41,776 – $89,075$55,901 – $89,050
24%$89,076 – $170,050$178,151 – $340,100$89,076 – $170,050$89,051 – $170,050
32%$170,051 – $215,950$340,101 – $431,900$170,051 – $215,950$170,051 – $215,950
35%$215,951 – $539,900$431,901 – $647,850$215,951 – $539,900$215,951 – $539,900

6 Factors for How Much Income Tax You’ll Pay

There are a number of ways to reduce your total income tax obligation while many others that can drive your obligation up. Here are six of the biggest factors in calculating income tax:

1. Taxable Income

The federal tax system is progressive, meaning that generally your tax rate increases as your income increases. The amount of taxable income you have determines what your tax bill will be.  Marginal tax rates determine how taxable income is taxed and those who pay income taxes are divided up into different ranges known as tax brackets. Income in each bracket is then taxed at a specific rate.

2. Filing Status

6 Factors That Affect How Much Income Tax You Pay

Besides income, the taxes you pay depend on your filing status. So whether you file as single, married filing separately, married filing jointly or head of household will affect how much income tax you owe. For the tax year 2022, single filers with taxable income of up to $10,275 and married couples filing jointly with taxable income of up to $20,550 are taxed at a rate of 10%. See the table above for more information.

3. Adjustments

To determine your total amount of taxable income, you must first add up all of your earned income (from salaries, wages and tips) and unearned income (from sources like Social Security, other retirement accounts and dividend payments). Then, you subtract your adjustments to find your adjusted gross income (AGI). Adjustments to income include student loan interest payments, IRA contributions and moving expenses.

4. Exemptions

After you’ve accounted for your adjustments, you’ll arrive at your taxable income amount by subtracting your deductions and your exemptions. There are personal exemptions that you can claim for yourself and your spouse. And then there are dependency exemptions that you can claim for your dependents.

5. Tax Deductions

6 Factors That Affect How Much Income Tax You Pay

Deductions can get a bit more complicated. Many taxpayers claim the standard deduction, which depends on your age, your income and your filing status. You can also itemize your deductions by adding up all of your eligible expenses.

Some deductible expenses include mortgage interest, charitable contributions and medical expenses. Depending on what gives you the larger deduction, you’ll need to either take the standard deduction or itemize your deductions.

Related Article: What Can You Deduct at Tax Time?

6. Tax Credits

Unlike adjustments, exemptions and deductions, tax credits apply to your final tax bill instead of your taxable income. Tax credits are only available to taxpayers in certain circumstances, like those who earn below a certain amount, individuals with childcare expenses and those who have adopted a child.

There are also tax credits associated with getting a post-secondary education, installing energy-efficient equipment at home and enrolling in a government health insurance plan. Some of these tax credits are even refundable, meaning that if your credit exceeds your liability you’ll get the difference refunded to you.

The Bottom Line

No one likes paying income taxes. But understanding the factors that impact how much you will pay can help you take steps to lower your tax bill. Your adjusted gross income is calculated using a number of tax credits and deductions on top of taking into account how much income you have received for the year. This is why it’s important to have an expert on your side even before it’s time to pay your taxes so that you’re planning ahead.

Tips for Tax Planning

  • Taxes can be difficult and no one wants to pay more than their fair share. It’s important to have experts, like a financial advisor, looking out for you during the year so that you can properly plan ahead on your taxes. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • There are a number of great tax resources that can get you more informed about tax planning. In fact, you can check out our guide to tax planning to learn more.

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