Now's a great time to get a handle on your 2016 income taxes. Image source: Pixabay.
Taxes are the price we pay for a civilized society.
-- Supreme Court Justice Oliver Wendell Holmes, Jr.
Taxes pay for basic services we all rely on, such as roads and bridges, firefighters and police, military protection, public education, and as a social safety net for the elderly and disabled. And while we could argue all day (and never reach a satisfactory answer) as to how much taxes are the right amount, and how much are an unnecessary burden, everyone should be able to agree on this one thing: Nobody should pay a penny more than they are required to pay.
So how much income tax will you have to pay in 2016? Let's take a closer look at the factors that will help you figure it out.
Understanding your deductions
It might seem like the best place to start is with the tax brackets, but that's not the case. This is because the tax brackets are based on your taxable income, or your adjusted gross income. When it comes to getting to your adjusted gross income, you'll use one of two methods: You'll either take the standard deduction or you'll itemize your deductions.
Depending on your filing status, age, and a few other things, your standard deduction could be as low as $6,300 for single filers under 65 or more than $13,500 for married joint filers over 65.
If expenses you could itemize, including mortgage interest, state and local taxes paid, charitable contributions, business use of personal property, and other things exceeds the standard deduction you qualify for, then you'd want to claim the itemized deduction.
Once you know your deduction, then you'll be able to take a look at the tax rates. For more on itemizing vs the standard deduction, go here.
Tax brackets and your marginal tax rate
Adam Smith, one of the great economics and taxation minds of history, said, "It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion." In principle, this is how the American progressive tax system, with seven income brackets, functions today.
Here are the 2016 income brackets, tax, and marginal tax rates:
Single filing status:
|
Income over | But not over | Pays this tax | of income over | ||
|---|---|---|---|---|---|
| $0 | $9,275 | na | + | 10% | $0 |
| $9,275 | $37,650 | $927.50 | + | 15% | $9,275 |
| $37,650 | $91,150 | $5,183.75 | + | 25% | $37,650 |
| $91,150 | $190,150 | $18,558.75 | + | 28% | $91,150 |
| $190,150 | $413,350 | $46,278.75 | + | 33% | $190,150 |
| $413,350 | $415,050 | $119,934.75 | + | 35% | $413,350 |
| $415,050 | $120,529.75 | + | 39.6% | $415,050 |
TABLE BY AUTHOR. DATA SOURCE: IRS.
Head of household:
| Income over | But not over | Pays this tax | of income over | ||
|---|---|---|---|---|---|
| $0 | $13,250 | na | + | 10% | $0 |
| $13,250 | $50,400 | $1,325 | + | 15% | $13,250 |
| $50,400 | $130,150 | $6,897.50 | + | 25% | $50,400 |
| $130,150 | $210,800 | $26,835.00 | + | 28% | $130,150 |
| $210,800 | $413,350 | $49,417.00 | + | 33% | $210,800 |
| $413,350 | $441,000 | $116,258.50 | + | 35% | $413,350 |
| $441,000 | $125,936.00 | + | 39.6% | $441,000 |
TABLE BY AUTHOR. DATA SOURCE: IRS.
Married filing jointly or qualifying widow(er):
| Income over | But not over | Pays this tax | of income over | ||
|---|---|---|---|---|---|
| $0 | $18,550 | na | + | 10% | $0 |
| $18,550 | $75,300 | $1,855 | + | 15% | $18,550 |
| $75,300 | $151,900 | $10,367.50 | + | 25% | $75,300 |
| $151,900 | $231,450 | $29,517.50 | + | 28% | $151,900 |
| $231,450 | $413,350 | $51,791.50 | + | 33% | $231,450 |
| $413,350 | $466,950 | $111,818.50 | + | 35% | $413,350 |
| $466,950 | $130,578.50 | + | 39.6% | $466,950 |
TABLE BY AUTHOR. DATA SOURCE: IRS.
Married filing separately:
| Income over | But not over | Pays this tax | of income over | ||
|---|---|---|---|---|---|
| $0 | $9,275 | na | + | 10% | $0 |
| $9,275 | $37,650 | $927.50 | + | 15% | $9,275 |
| $37,650 | $75,950 | $5,183.75 | + | 25% | $37,650 |
| $75,950 | $115,725 | $14,758.75 | + | 28% | $75,950 |
| $115,725 | $206,675 | $25,895.75 | + | 33% | $115,725 |
| $206,675 | $233,475 | $55,909.25 | + | 35% | $206,675 |
| $233,475 | $65,289.25 | + | 39.6% | $233,475 |
TABLE BY AUTHOR. DATA SOURCE: IRS.
The rates above are based on your adjusted gross income, meaning income after either your standard or itemized deduction is subtracted, and other deductions, such as pre-tax contributions to your 401(k) or similar retirement plan. For more on tax brackets, go here.
Don't forget about tax credits
Once you've determined how much tax you owe based on the tables above, you may more tax breaks to take advantage of in the form of tax credits. Tax credits come from a variety of sources, including the purchase of things like certain alternative fuel vehicles, alternative energy systems, and credits for low-income retirement savers. There's also credits for having a dependent child under 17, and costs for child and dependent care, to name a few common credits.
The difference between tax credits and tax deductions, is that credits subtract from the taxes you owe, while deductions lower your taxable income. Chances are, if you qualify for a big tax credit, you'll know about it. However, some smaller credits, such as the 10% credit for certain energy-efficient home improvements may slip through the cracks, so make sure you keep those things in mind. After all, spending $2,000 for new external windows on your home could reduce your taxes by $200 this year.
Look at your 2015 return; make a plan for 2016
With the federal filing deadline of April 18, 2016 about two weeks away, you've probably already done (or are close to being done) your 2015 taxes. And unless your income situation is changing dramatically this year, or if you're going to have a child, buy a home for the first time, or experience some other change to your tax situation, you'll probably owe similar tax in 2016 as in 2015.
But at the same time, it's early enough in the year that you can make plans today to reduce your taxes, whether it's by increasing charitable contributions, ramping up retirement savings, or some other means. 2016 is only 25% over. Take advantage of that and get your tax house in order now.
