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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 America, federal and often state and local governments collect income taxes. Understanding which factors affect how much income tax you have to pay can help you make more informed decisions.

Check out our income tax calculator.

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 tax year 2019, single filers with taxable income of up to $9,700 and married couples filing jointly with taxable income of up to $19,400 are taxed at a rate of 10%.

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.

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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 Takeaway

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.

Update: So many people reached out to us looking for tax and long-term financial planning help, we started our own matching service to help you find a financial advisor. The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and your goals. Then the program will narrow down your options to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

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Liz Smith Liz Smith is a graduate of New York University and has been passionate about helping people make better financial decisions since her college days. Liz has been writing for SmartAsset for more than four years. Her areas of expertise include retirement, credit cards and savings. She also focuses on all money issues for millennials. Liz's articles have been featured across the web, including on AOL Finance, Business Insider and WNBC. The biggest personal finance mistake she sees people making: not contributing to retirement early in their careers.
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