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3 Common Misconceptions about US Federal Income Taxes

Taxes are like death. Or death is taxes. Something something… Unavoidable!


Oh, I can’t remember the saying, but you catch my drift.


Not only are taxes inevitable, they can be really confusing. That’s why there’s a whole profession built around helping you make sure you pay what’s due, without paying extra.


Usually, when people are talking about taxes, they mean what’s getting paid to Uncle Sam - your federal income taxes - so that’s what we’re going to focus on here. Yes, many states also have income taxes. So do some municipalities. But for now, we’re just going to focus on federal income taxes (excluding payroll taxes for now).


Itemized Deductions vs. Standard Deduction

Since the 2017 Tax Cuts and Jobs Act (often referred to as the Trump tax cuts - either fondly or angrily), almost everyone has used the standard deduction. For tax year 2023, the standard deduction for a single person under age 65 is $13,850, and $27,700 for a married couple filing jointly. In order to take itemized deductions instead, your itemized deductions would need to be more than the standard deduction. Common itemized deductions include (all subject to different limits:

  • State and Local Taxes (SALT)

  • Mortgage interest on your primary or secondary residence

  • Charitable Contributions


Marginal Tax Rates vs. Effective Tax Rates

Once we’ve figured out Itemized vs. Standard Deductions, we can get to taxable income. Federal taxes are progressive, meaning that people who make more money pay more in taxes. Your first taxable dollars are taxed at 10%, then some at 12%, some at 22%, and so on. What some people don’t understand is that if you’re in the 22% bracket, you’re still paying 10% of the dollars in the 10% bracket and 12% in that bracket. I’ve met multiple people who don’t realize this - they think that once they get into the 22% bracket, every dollar they make is taxed at 22%. Thankfully, that’s not the case.


“I want to make less money, so I don’t pay so much in taxes”

Would you rather get $100 and have to give up $40 (leaving you with $60), or would you prefer to get $50 and have to give up $20 (leaving you with $30)? If you make more money, you still end up with more, even if it sucks to pay more in taxes. Don’t cut off your nose to spite your face.


“In this world, nothing can be said to be certain, except death and taxes.” Hey, I think that’s it! Big thanks to Ben Franklin.

 

As always, keep in mind that you don't have to go it alone. Check out my website to see what it's like to work with me and reach out if you have any questions.


If you found this post helpful, help spread the word! But remember, this is solely for educational purposes - it's not advice.

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