#BeInTheKnow: Keeping Up with Your Taxes
12 May 2020
Recently, there has been an important change made to U.S. tax filing. Americans will have until July 15 to file federal taxes this year. As this extended deadline presents itself, Americans may find themselves at various stages in the tax process — whether its preparing documents, reaching out to different resources or wrapping up filing and looking to stay organized in the upcoming year. We want to open up the conversation during a season where taxes, even if not a primary focus, are a relevant and necessary routine. We’ll be sharing some topics with you as a three-part #MindfulTaxes series, starting here.
It’s often easy to look at taxes as purely something we pay to fund the government. While that is partially true, it’s somewhat of a misconception. The main reason for the creation of the IRS was to influence behavior. For example, since generosity is an American value, charitable donations are often tax-deductible, which lowers your tax bill while encouraging you to give more.
The tax code can be tricky; plus, there are so many rumors out there about how to play the tax game. But the best approach to #BeInTheKnow is to uncover misconceptions. Whether you’re chatting with coworkers or having discussions around the dinner table, everyone seems to have an opinion about how to handle taxes. But not everything you hear is always true. So, let’s put some of the most common tax rumors to rest.
Does your tax bracket determine your tax rate?
You may have heard of federal tax brackets. They range from 0% to over 30% of your annual income. But your marginal tax rate does not determine how much you pay on every dollar you earn. For example, if you are making $90,000 a year, with a marginal rate of 24% (individuals making $82,500-$157,500) you do not owe 24 cents for every dollar you make.
Instead you owe 24 cents for every dollar you make over $82,500. Your first $82,500 earned will be taxed at lower rates, according to their brackets.
While there are consequences to making more money and landing in a higher tax bracket, the tax implications may not be as steep as you think.
We should therefore be more concerned with our effective tax rate (the average amount we pay for each dollar we earn) rather than our marginal rate (the bracket our final dollar happens to fall in).
Here’s a quick example:
Jointly, or not?
Another misconception relates to the debate couples have on whether to file ‘jointly’ or ‘married filing separately’. For the majority of families, there is no question – filing jointly is almost always advantageous (consult with your tax professional first). There are some situations, like overwhelming medical bills or pending legal cases, where couples would benefit from filing separately. Why is this? Think back to why we’re taxed – to influence behavior. If filing jointly and married filing separately offered the same advantages, then there would be no tax incentive to get or stay married.
Uncovering misconceptions is essential to finding your path to financial confidence. Doing so helps take an overwhelming financial subject, like taxes, and boils it down to something much more manageable.
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Neither MML Investors Services nor any of its employees or agents are authorized to give legal or tax advice. Consult your own personal attorney legal or tax counsel for advice on specific legal and tax matters.