The only three things that are certain in life are death, taxes, and your parents beginning their voicemails telling you that it's them as if you can't tell who it is.

There are many types of taxes (too damn many), but income taxes get the most attention—and rightfully so. They account for almost 48 percent of all government revenue in America. To determine how much each taxpayer is responsible for paying, the IRS established tax brackets.

Tax brackets

Many people know what tax brackets are, but not as many know how they actually work. The U.S. uses a progressive tax system, so the more money you make, the more taxes you pay. Theoretically. We all know the wealthy seem to Eurostep their way around their fair share of tax obligations, but that's a different topic for a different day.

Your tax bracket is the highest tax rate you'll have to pay on your income and is determined by your taxable income. Your taxable income may vary from your regular income because it includes tax credits and deductions. For example, if you make $60,000 per year but have $5,000 in tax deductions, only $55,000 will be taxable.

As of 2020, there are seven tax brackets:

Single

  • 10%: $0 to $9,700
  • 12%: $9,701 to $39,475
  • 22%: $39,476 to $84,200
  • 24%: $84,201 to $160,725
  • 32%: $160,726 to $204,100
  • 35%: $204,101 to $510,300
  • 37%: $510,301 or more

Married, filing jointly

  • 10%: $0 to $19,400
  • 12%: $19,401 to $78,950
  • 22%: $78,951 to $168,400
  • 24%: $168,401 to $321,450
  • 32%: $ 321,451 to $408,200
  • 35%: $$408,201 to $612,350
  • 37%: $612,351 or more

Married, filing separately

  • 10%: $0 to $9,700
  • 12%: $9,701 to $39,475
  • 22%: $39,476 to $84,200
  • 24%: $84,201 to $160,725
  • 32%: $160,726 to $204,100
  • 35%: $204,101 to $306,175
  • 37%: $306,176 or more

How your tax bill is calculated

All it takes is a few minutes scrolling social media or reading online comments to realize that a common misconception is that your income is taxed at whatever percentage your bracket is. That's not quite how it works. Different portions of your income are taxed at different rates. Let's imagine that you're single and make $50,000 per year. Instead of all of your income being taxed at 22 percent, it will be taxed at the following:

  • The first $9,700 will be taxed at 10%
  • $9,701 through $39,475 will be taxed at 12%
  • $39,476 through $50,000 will be taxed at 22%

Instead of paying $11,000 in taxes ($50,000 * 22%), you will only pay $6,858.50:

  • $9,700 * 10% = $970
  • $29,775 * 12% = $3,573
  • $10,525 * 22% = $2,315.50

$9,700 + $3,573 + $2,315.50 = $6,858.50

This is supposed to provide more equality in the tax system. As a result, someone who may fall into a particular bracket by a small amount doesn't have to potentially pay thousands more in taxes. Imagine making $40,000 and having to pay 22 percent in taxes versus someone who makes $39,000 paying 12 percent:

  • $40,000 * 22% = $8,800
  • $39,000 * 12% = $4,680

Even though you made $1,000 more, you'd end up with $3,120 less after taxes. Nope—couldn't be me. I'd have to pull up on Uncle Sam 'nem and come see 'bout 'em.

Determining your tax return

The majority of companies will automatically have taxes deducted from your paychecks and sent to the IRS for you. If you're self-employed, it's expected that you pay your income tax every quarter. It's easy to forget about taxes when they're not automatically taken from you, so paying quarterly will stop you from having a huge bill once you file that following year. That tax bill will sneak up on you like Apple Music charges.

If at the end of the year, you didn't pay enough to cover your total income tax due, you'll owe the IRS the remaining amount. If you paid too much, the IRS will send you what's owed via a tax refund.

While tax deductions decrease your taxable income, tax credits will either add to your tax return or subtract from what you owe. For example, if you owe $5,000 in taxes but have $7,000 in tax credits, you'll receive a $2,000 return.

Want to learn more about tax brackets? Shoot us a note or drop a comment and let us know. You can also visit Finessin' Finances.

THIS ARTICLE ORIGINALLY APPEARED ON FINESSIN' FINANCES BY STEFON WALTERS. IT IS REPUBLISHED WITH PERMISSION.