Do you know your tax bracket? If you don’t, you should. By knowing what tax bracket you fall under will help you strategize your money savings. If you’re working and receiving a paycheck, you probably see all the taxes that are taken out such as federal tax, state tax, and social security.
The chart below I took from Turbotax Intuit. Take a look at the taxable income brackets for 2020-2021 and see where you fall within.
We all pay taxes and we know the more we make, the higher taxes we pay. Why should you be so aware of about tax brackets?
Prepare How Much Taxes You Owe
There’s nothing like not knowing whether you’ve paid enough taxes or paid too much taxes. Knowing what tax bracket you’re in can help prepare you for what is to come when you file your taxes. Let’s say you have a primary job and a couple of side hustles but you didn’t pay taxes yet on them or didn’t pay enough taxes. Guess what? You’ll likely be paying taxes during your tax filing and knowing how much that could be will help you prepare.
If You’re On the Borderline
If your taxable income is on the borderline with the next tax bracket then knowing this will help you make key decisions to keep you in the lower tax bracket. Let’s say you have a household taxable income of $81,000 married filing jointly. You would be at the 22% tax rate. The 12% tax rate limit is $80,250 which is $750 difference from the taxable income you made. If you were able to reduce your taxable income by $750, you would be saving yourself 10% which is pretty significant. Same goes if you’re in between the 22% and the 24% borderline and so on. The key to knowing this early is because you cannot adjust your taxable income after the year has ended. When you’re preparing to file your taxes and you realize you just needed a few more dollars to lower your tax bracket, it’s too late. In this example, if you needed to reduce your taxable income by $750, you need to have done it in that tax year.
Take Extra Steps
Knowing what tax brackets you’re in will help determine whether you need to take extra steps or not. In the example above, how do you reduce your taxable income? You can donate money, donate to charity, donate to church, increase or max out your pre-tax retirement contribution, etc. Again, these actions need to occur during the tax year, not after the tax year when you’re preparing your tax return.
Similar to budgeting, one of the key tasks is to follow your spending. Taxes are behind the scene and you don’t think about it often until it’s time to file your taxes. Take a look at your past tax returns and track what your household taxable incomes were? Were you at the lower end of a tax bracket, higher end, or smack in the middle of a tax bracket? If you’re at the lower end, you want to see if you can make it to the lower tax bracket. If you’re in the higher end, you want to avoid going to the next tax bracket. If you’re in the middle, well you don’t have much options. Being strategic about taxes can mean the difference of paying more taxes or paying less taxes. I prefer to pay less taxes. If you are interested in following my journey, email subscribe to get alerts of latest posts or follow me on Facebook and Instagram.