December is coming to a close, and now's the time that many people are doing year-end tax planning for 2017. To make the right moves, you need to know what your general tax situation is likely to look like when you get around to preparing and filing your tax return in early 2018.
Those who make $100,000 are doing better than the typical American family, but you still can't afford to pay more money to Uncle Sam than you need to. No two taxpayers' returns will look exactly alike, so it's impossible to provide an answer to how much in tax you'll owe that will be right for everyone. Nevertheless, by looking at a couple of baseline scenarios for households earning $100,000, you can get a better guide on where you're likely to stand.
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Scenario 1: On your own
In our first example, we'll look at an unmarried person with no dependents making $100,000 per year. This could involve someone who never married and has no children. It could also apply to a divorced person whose ex-spouse claims any children the couple had as dependents, assuming that any payments that the person makes to the ex-spouse are treated as maintenance and support rather than alimony. To keep things as simple as possible, we'll assume that this person takes the standard deduction and keeps any investable assets in a tax-favored retirement account, avoiding any current tax impacts.
From adjusted gross income of $100,000, subtract the standard deduction of $6,350 and a single personal exemption of $4,050. That makes taxable income equal to $89,600. That amount is just below the upper end of the 25% tax bracket, with the tax calculation amounting to $18,138.75. That works out to an effective tax rate of 18%.
Scenario 2: With a family
By contrast, our second example involves a married couple with two children and total household income of $100,000. Again, this family takes the standard deduction, and all of its income comes from wages and salaries.
For this taxpayer, the standard deduction is double what singles get, at $12,700. The family of four gets four personal exemptions at $4,050 per exemption, which provides another $16,200 in reductions. That brings taxable income down to $71,100. That amount keeps this taxpayer near the upper end of the 15% bracket, and the resulting tax is $9,732.50. Moreover, if the two kids qualify for the child tax credit, then an additional $2,000 in tax savings brings the net down to $7,732.50, or less than 8% of their income as an effective tax rate.
How 2 taxpayers can pay so different an amount of tax
You can see just how big a role in your tax liability your filing status plays. With a completely different set of tax brackets that apply and larger standard deductions for joint filers than for singles, the tentative tax that you'll owe is varies greatly between different filing statuses.
In addition, the number of household members you have also has a big impact. Families with children not only get more personal exemptions but also get to enjoy a range of tax credits. A family making $100,000 earns too much to qualify for some of those breaks, including the earned income credit. But even without full access to every possible tax break, larger families can often reduce their taxable income further than single filers without dependents.
The more complex your tax return gets, the harder it is to generalize. Those who have investments will have additional income, some of which can qualify for preferential tax rates. Taxpayers with particular types of expenses, such as home-related costs, educational expenses, or medical costs, can sometimes get deductions or credits that will reduce their tax bill further.
The net result is that although singles who make $100,000 can see effective tax rates approaching 20%, families can see lower effective rates of 10% or less. It's therefore important for singles especially to take advantage of ways to reduce taxable income, such as contributing to a 401(k) retirement account at work, so that they can pay as little as possible to Uncle Sam come April.
