Here’s what to consider when calculating income tax.
The amount of income tax you owe depends on your income, where you live, and any tax deductions or credits.
The United States has a progressive tax system, which means that rates increase as your income goes up. One common misconception about the tax system is that making more money and moving to a higher tax bracket could mean you make less money than you did before, after taxes. This is not true.
Tax brackets are the same for everyone regardless of income, which means someone making $1,000,000 per year will pay the same amount of income tax on their first $10,000 of taxable income as someone making $50,000 per year pays on their first $10,000 of taxable income.
How to calculate income tax
You can use a free online resource such as our Money Guy Tax Guide to estimate how much you will owe in federal income tax. The only information you need to know to estimate your federal income tax owed is your taxable income. State income tax is a little more difficult to determine, as all states have different rates and brackets, and some states have no income tax at all.
We discuss how to save money on taxes and our top tax planning tips in The Money Guy Show episode below: