Understanding Income Taxes for the rest of us
Tax time has been historically debated as either a time of great joy for some (if you're due a big refund) or a time of great stress for others (if you owe the government money).
But what really determines either situation? Let's break down the basics for the rest of us- so next time you'll have a baseline of if you're due a refund, you owe money, or if that Tax preparer is actually ripping the tissues out of you.
What Exactly Are Income Taxes?
Think of income taxes as the "membership fee" you pay for living and working in our society. It's the money deducted from your paycheck or paid from your earnings to fund public services like schools, roads, hospitals, and emergency responders. Simply put, income taxes are your contribution to keeping society running smoothly.
How Does the Government Decide How Much I Pay?
Your income tax isn't a random number— the government uses "tax brackets" to determine how much you owe or pay. The higher your income, the higher the percentage you owe on that additional money. Take the following example, where $100,000 in income for a single filer equates to $14,006 owed in taxes.
Every tax software begins by calculating this number. It helps to give a baseline of how much you actually owe based on your income- without applying any deductions or credits.
Tip: You can use the interactive tax calculator below to see how different income levels and filing statuses affect your taxes.
Deductions, Credits, and Withholdings: How You Can Pay Less
The good news is you don't always pay taxes on every dollar you earn. The government offers deductions (like the standard deduction applied above- which everyone gets) or credits (like the Earned Income Tax Credit or Child Tax Credit) that can directly reduce the taxes you owe.
Withholdings are a little different from deductions or credits. Withholdings are taxes that you actually prepay - usually through an agreement with your employer in the following way:
- You fill out a W4 form at the start of your employment. (typically through HR)
- Your employer uses that to determine how much taxes to withhold from each paycheck.
- You pay these taxes through your paycheck throughout the year.
- At the end of the year, it's reported on form W2 - in box 2 (Federal Income Tax Withheld).
This is done to ensure you don't owe money on taxes at the end of the year. The goal is really to break even. i.e. the taxes withheld or prepaid should be equal to the taxes owed. Unsurprisingly, this is not always the case if other factors affect your tax situation. (e.g. life changes, multiple jobs, etc.)
| Description | Amount | Notes |
|---|---|---|
| Gross Income | $100,000 | Your total income before any deductions |
| Standard Deduction | -$13,850 | Standard deduction for single filers in 2024 |
| Taxable Income | $86,150 | This is what your tax is calculated on |
| Tax Owed | $14,006 | Calculated using tax brackets |
| W-2 Withholdings | $17,000 | Amount withheld from your paychecks |
| Refund Due | $2,994 | The difference between withholdings and tax owed |
This provides a realistic example of a single filer with no dependents or other credits who has W2 income of $100,000.
Planning Ahead: How to Avoid Surprises
Avoiding surprises at tax time involves a bit of planning. Regularly checking your tax withholdings vs taxes on expected total income, keeping track of deductible expenses throughout the year, and setting aside a small amount each month can help ensure that when tax season arrives, you'll feel prepared rather than overwhelmed.