Federal income taxes can be very confusing, and I often see them misunderstood. In this article, I’m going to explain how federal income taxes and tax returns work at a high level.
Each year, federal tax brackets change as the value of the dollar changes. Tax rates differ for single and married individuals. According to the IRS, the tax rates for 2024 are as follows:
Single Rates (1):
10% rate on Taxable income from $0 to $11,600
12% rate on taxable income over $11,600 and up to $47,150
22% rate on taxable income over $47,150 and up to $100,525
24% rate on taxable income over $100,525 and up to$191,950
32% rate on taxable income over $191,950 and up to$243,725
35% rate on taxable income over $243,725 and up to $609,350
37% rate on taxable income over $609,350
Married Filing Jointly Rates (1):
10% rate on taxable income from $0 to $23,200
12% rate on taxable income over $23,300 and up to $94,300
22% rate on taxable income over $94,300 and up to $201,050
24% rate on taxable income over $201,050 and up to $383,900
32% rate on taxable income over $383,900 and up to $487,450
35% rate on taxable income over $487,450 and up to $731,200
37% rate on taxable income over $731,200
To arrive at taxable income, there are above-the-line deductions and below the line deductions that taxpayers can receive. Examples of above the line deductions are 401(k) contributions, HSA contributions, health insurance premiums for the self-employed, and student loan interest. Above-the-line deductions DETERMINE your Adjusted Gross Income (AGI) (3).
Below-the-line deductions are deductions FROM AGI that DETERMINE taxable income. Below-the-line, you can either elect the standard deduction or itemized deduction (whichever is greater). The standard deduction is universal and changes each year. For 2024, the standard deduction for taxpayers under 65 is as follows (3):
- Single: $14,600
- Married: $29,200
- Additional amount for being age 65+ or blind
Individuals can elect the itemized deduction if greater than the standard deduction. Itemized deductions that taxpayers claim can include (4):
- State and local income or sales taxes.
- Real estate and personal property taxes.
- Home mortgage interest.
- Personal casualty and theft losses from a federally declared disaster.
- Gifts to a qualified charity.
- Unreimbursed medical and dental expenses that exceed 7.5% of adjusted gross income.
Some itemized deductions, such as the deductions for taxes, are limited. Individuals should view the instructions from Schedule A (Form 1040) for more information on limitations (4).
After electing the standard deduction or itemized deduction, you arrive at taxable income. Your income is taxed at different rates as seen previously in the article.
When filing taxes, a taxpayer receives a tax return if tax withheld is greater than tax owed for the year. On the other hand, a taxpayer must pay in if tax owed is greater than tax withheld for the year.
The Marginal tax rate is the rate of tax charged on a taxpayer’s last dollar of income. The Effective tax rate is the actual percentage of taxes you pay on all your taxable income.
This is a high-level explanation on how taxes work. There are many details associated with income taxes that I did not discuss here. This is not tax advice. We always recommend consulting with your tax preparer before making any tax-related decisions. Tax planning comes into play by not just focusing on reducing your tax bill this year but helping to reduce your tax bill over your lifetime.
1 IRS Announces 2024 Tax Brackets, Standard Deductions And Other Inflation Adjustments (forbes.com)
2 Here’s Why Above-The-Line Deductions Are So Valuable – Forbes Advisor
3 IRS Announces 2024 Tax Brackets, Standard Deductions And Other Inflation Adjustments (forbes.com)
4 Tax basics: Understanding the difference between standard and itemized deductions | Internal Revenue Service(irs.gov)
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