THIS IS STILL BEING BUILT…

In the early 1900’s the United States government decided that they wanted more money than import and export tariffs could make for them. They created the Income Tax, which at that time was a voluntary tax that people paid to the Federal government. It later became mandatory, and soon state governments did the same.

How do federal income taxes work?

You pay taxes as a percentage of your income, which are divided into layers called tax brackets. Each layer is taxed at a different rate, so the total amount you pay depends on how much you earn. In the U.S., the federal income tax is ‘progressive’, meaning that the tax PERCENTAGE increases as your income rises and amount you pay increases at an even FASTER rate!

Currently, tax rates are separated into seven different brackets by income level: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

These tax brackets change, often each year. You can see the Federal Tax Brackets for the current year at : https://www.irs.gov/filing/federal-income-tax-rates-and-brackets

You can find the State Tax Brackets by googling “what are the wisconsin tax brackets”. The rates are different for married versus single people. (Married is cheaper). Remember: When your income jumps to a higher tax bracket, you don’t pay the higher rate on your entire income. Instead, you are taxed only on the part that is in the higher bracket.

For example:

A single person with a taxable income of $58,000 per year would pay:

10% on the first $11,600, (which makes the taxable amount of $11,600 x 0.1=$1160) so that the first tax chunk is $1,160

12% on the next chunk up to $47,150, (that taxable amount would be 35,549 which you get by subtracting $11,601 from $47,150) and then multiply by 0.12 making the second tax chunk as $4,265.88

22% from $47,151 to $58,000. That taxable amount is $10,849 ($58000-$47,151). Multiply by 0.22 gives the final tax chunk as $2,386.78

The total of these is your total Federal Tax…so add them together

the first tax chunk $1,160 +
the second tax chunk $4,265.88 +
the final tax chunk as $2,386.78
which gives a total of $7,812.66 or about 13.5% of the $58,000 you earned.

You then have to run the same type of math for the state tax brackets so you you know what your whole income tax responsibility will be. Fortunately all this math is built-in to the Federal Income tax form 1040 and the State Income Tax forms. I only showed you this, so that you know how the underlying math is working.

Make sure you send in your taxes each year, even if you don’t owe any. The IRS has been known to come after people that they *think* might owe money because the tax form was not filed! They have been known to garnish your paycheck (take your paycheck), freeze your banking account so you can’t get your money, have you arrested! And this is when sometimes when they just THINK you owe them money!

Here is how to Federal taxes roughly work.
There are three 1040 forms depending on how much money you make. The basic concept of taxes when you fill out form 1040 is that you:

  1. You fill out who you are, single or married, and children (dependents)
  2. You Fill out the money you made. They call this income. Often from W-2’s or 1099’s
  3. You subtract the “Standard Deduction” which lowers your income. The amount varies Single people=$14,600, Married= $29,200. Essentially this means that single people making less than $14,600 pay no tax at all!
  4. You use their forms to calculate your tax and also you apply various credits that reduce it! These are things like “Child tax credit”
  5. You then subtract the amount that was already taken from your paychecks as taxes. This is from your W-2. Sometimes from 1099’s.
  6. If you paid to much (that’s bad) you get a refund. If you didn’t pay enough, you mail them a check.

Here is how to file state taxes (Wisconsin as an example).