Sorry to be the bearer of bad news, folks, but with only two months remaining this year, it's time once again to begin thinking about your federal income tax liability for 2017.
Let's face it, paying taxes isn't fun for anyone. But those taxes are what help keep the proverbial gerbil spinning on its wheel and the lights on for the federal government. If you're well prepared for what your federal income tax liability will be, you could save yourself a lot stress, and perhaps money, come tax time.
How to calculate your 2017 federal income tax
The important thing for you to remember when calculating your 2017 federal income tax liability is that your peak marginal tax rate, or the tax rate you pay on your last earned dollar of income, isn't your tax rate on all of your income. All seven federal income tax brackets in the U.S. are progressive, meaning your effective tax rate will probably be lower than your peak marginal tax rate. (I'll wait for a moment while you let out a tiny cheer.)
Let's take a closer look at the 2017 federal income tax brackets so you can get a better idea of how your tax liability is determined.
As you can see from the tax schedule below, there are seven income tax brackets, as well as four primary filing statuses. For the sake of simplicity, we'll stick to the single-filer bracket for our examples.
|Tax Rate||Single||Married, Filing Jointly||Married, Filing Separately||Head of Household|
|10%||$0 to $9,325||$0 to $18,650||$0 to $9,325||$0 to $13,350|
|15%||$9,326 to $37,950||$18,651 to $75,900||$9,326 to $37,950||$13,351 to $50,800|
|25%||$37,951 to $91,900||$75,901 to $153,100||$37,951 to $76,550||$50,801 to $131,200|
|28%||$91,901 to $191,650||$153,101 to $233,350||$76,551 to $116,675||$131,201 to $212,500|
|33%||$190,651 to $416,700||$233,351 to $416,700||$116,676 to $208,350||$212,501 to $416,700|
|35%||$416,701 to $418,400||$416,701 to $470,700||$208,351 to $235,350||$416,701 to $444,550|
According to wage data from the Social Security Administration, the average American earns about $30,000 a year. While that would place them squarely in the 15% income tax bracket, it doesn't mean all $30,000 is taxed at 15%. As you can see from the table above, your first $9,325 in income is taxed at just a 10% rate ($932.50). After that, dollars $9,326 through $30,000 would be taxed at 15% ($3101.10). Thus, the average-earning American would be expected to owe about $4,033.60 in federal income tax. That's an effective tax rate of 13.4%.
If you have a $75,000 annual salary, the same progressive tax rate applies. You'd owe 10% on your income earned between $0 and $9,325, 15% on your earned income between $9,326 and $37,950, and 25% on earned income between $37,951 and $75,000, your highest-earned dollar.
Unless you make less than $9,325, your effective tax rate should be lower than your peak marginal tax rate -- and that's a good thing.
Two important tax tidbits you should keep in mind
However, no discussion of how to calculate your federal income tax liability would be complete without also mentioning two other important tax tidbits.
The first is that the aforementioned calculation doesn't take into account any of the deductions or credits you might qualify for. For instance, most Americans are going to qualify for a standard deduction of $6,350 on their 2017 return, or $12,700 if they're a married couple filing jointly.
There are also a number of common deductions and credits, such as state and local tax deductions, the mortgage interest deduction if you're a homeowner, and the Earned Income Tax Credit for low- and middle-income workers. These deductions and credits, along with countless more that aren't listed here, may lower your tax liability and reduce your effective tax rate. In other words, consider the federal income tax examples above as a worst-case scenario. Chances are your liability will be lower, thanks to deductions and credits.
Secondly, it's important for taxpayers to realize that their goal should be to get as close as possible to owing, or being refunded, $0 from the federal government. While most taxpayers love a large refund check from Uncle Sam, the federal government is doing you no favors by hanging onto your hard-earned income without paying you any interest. If you adjust your tax withholding rate now, as opposed to waiting for a large refund in February, March, or April of next year, you can use that extra cash between now and the end of the year in your paycheck either to pay down debt that's accruing interest, or invest it. With the exception of needing to force yourself to save, there aren't many valid reasons for allowing the federal government to hold your tax dollars hostage.
Though tax time isn't much fun for most Americans, if you know what to expect, it doesn't have to be stressful.
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