What Low Income Earners Should Know About Tax Brackets

Perhaps you have heard claims that the top half of U.S. taxpayers pay 97% of all federal income taxes. When you put the politics aside and look at raw numbers, such claims are true. Yet there is a good reason for that. Our income tax system is a progressive system with different tax brackets applied based on income.

This is not to say that low income earners do not pay taxes. They do. Low income earners pay property tax. They pay sales tax, a variety of federal and state taxes on their cell phone service, and on and on. Still, they may not pay any federal income tax when they combine low tax brackets with a long list of federal and state tax credits.

A Progressive System

A progressive income tax system is a system that demands more from those who have more. The ‘progressive’ designation relates to the idea that income taxes become progressively higher the more a person earns. That is exactly how our system works. Ours is a progressive system with seven different income tax brackets.

Let us look at some numbers based on unmarried individuals who file as single taxpayers. If such a taxpayer earned anything up to $9,700 in adjusted gross income (AGI) in a single year, his federal income tax rate would be 10%. If that person earned between $9,701 and $39,475, his income would be taxed at 12%.

For the record, the remaining five tax brackets for single filers are:

  • 22% ($39,476 – $84,200)
  • 24% ($84,201 – $160,725)
  • 32% ($160,726 – $204,100)
  • 35% ($204,101 – $510,300)
  • 37%. ($510,301 or more).

As you can see, a higher percentage is applied as a taxpayer works his/her way up the brackets. Similar brackets apply to couples filing jointly or separately. Still, you might not yet understand why the top half of U.S. earners pay the vast majority of income taxes. A lesson on tax deductions and credits should explain it well enough.

Reducing Tax Liabilities

A tax deduction reduces your AGI while a credit reduces your tax bill. Let’s say your income tax bill for the year is $17,600 without any deductions or credits. That is exactly what you would owe if you and your spouse filed jointly with a taxable income of $80,000 at a rate of 22%. But wait. Federal law allows you to take a $24,400 standard deduction. That reduces your AGI to just $55,600 and your tax bill to $6,672.

You and your spouse also have three children, making you eligible for an Earned Income Tax Credit of $6,557. Your total federal income tax bill would be reduced to just $115. Any additional tax credits – like the child tax credit – would wipe that out fairly easily.

Like many other low-income earners, the combination of federal deductions and tax credits results in you paying little to no income tax. Even better is the fact that many tax credits are refundable. They can get you a refund even if you do not make enough to pay income tax. It would be like any other refund, paid via direct deposit or a paper check.

It’s True, with a Caveat

In the end, the one thing low income earners should know about tax brackets is that they protect those with the fewest financial resources from having to pay excessive income taxes. When people claim that the wealthy pay most of the income taxes, it is true – the caveat being that wealthier people pay more income taxes because they have more. Low income people pay less because they have less.

And now you know.

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