We’re not in the same tax bracket.
Federal income tax liability is based on a percentage of your taxable income. Don’t confuse taxable income with gross income, or the total amount of money you earned over the course of a year.
What Is Taxable Income?
Taxable income is the money you earn from work, investments, and other sources minus deductions and exemptions. Your tax rate is determined by your taxable income, which is placed in bands or brackets as seen below. But, before we look at how tax brackets work, it’s important to know how taxable income is derived.
Adjusted gross income - deductions - exemptions = taxable income
Deductions
Deductions are the expenses you can “write off” of your adjusted gross income when filing your federal income tax return.
Deductions will decrease your taxable income. You can take some deductions whether you take the standard deduction* or itemize. Other deductions can only be used if you itemize.
Deduct these expenses if you take the standard deduction or itemize:
Alimony payments
Business use of your car
Business use of your home
Money you put in an IRA
Money you put in a health savings account
Penalties on early withdrawals from savings
Student loan interest
Teacher expenses
Deduct these expenses only if you itemize:
Bad debts
Canceled debt on a home
Capital losses
Donations to charity
Gains from the sale of your home
Gambling losses
Home mortgage interest
Income, sales, real estate, and personal property taxes
Losses from disasters and theft
Medical and dental expenses over 7.5% of your adjusted gross income
Miscellaneous itemized deductions
Opportunity zone investment
*If the standard deduction is larger than the amount of itemized deductions, you should take the standard deduction. If the standard deduction is less than your itemized deductions, you should itemize.
These were the standard deductions by age in 2023.
Exemptions
Exemptions are the dollar amounts that can be deducted from your adjusted gross income to reduce your taxable income. Exemptions are, for the most part, the people living in your household.
There are only 2 categories of exemptions:
Self
Dependent(s)
When you complete your tax return at the end of the year, you will count yourself as one exemption and any dependent as additional exemptions. Be sure to read the rules to ensure the people living in your household qualify as legal dependents, according to the IRS.
2023 Tax Brackets
For a single taxpayer in 2023, the rates were:
When your income jumps to a higher bracket, you don’t pay the higher rate on your entire income. You pay the higher rate only on the amount that is in the higher tax bracket.
Tax Brackets Work Like This
According to the U.S. Bureau of Labor, the average American salary, or gross income, is $59,384**. So, the first $11,000 is taxed at 10%. The portion of income in the second bracket is taxed at 12%, and the portion of income in the third bracket is taxed 22%, for a total tax liability of $8,371.64.
**For the purposes of our example, we’ll pretend this is taxable income.
That’s how tax brackets work. If you have questions about your tax bracket or any tax-related questions, the professionals at AMG Finance are here to help. Our offices are staffed year-round with qualified tax preparers. Call or come by to speak with a tax specialist.
