How do tax brackets work?

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COLUMBIA, SC (WIS) – How do tax brackets work?

Josh Bradley of Capital City Financial says the US system operates on a marginal rate basis, which means we are taxed on a tiered basis, so only your top income is taxed at the rate your class is in.

For example, people get a flat-rate deduction, meaning part of their income is completely tax-free. That’s $13,000 a year for single people and more than $26,000 a year for couples.

If you have a couple that makes $60,000 a year, there’s actually more money tax-exempt than it’s actually taxing at its 12 percent tax rate.

What are some common misconceptions about tax brackets?

A lot of people think they should get every bullet or deduction possible. However, for many people, the deductions do nothing for you because the standard deduction is high. Especially if you’re stuck with things like a mortgage where you pay interest, getting a deduction could be a bad decision.

Another misconception is that bonuses are taxed more heavily. The government requires companies to hold a higher rate, but bonuses are taxed the same as ordinary income.

Bradley says people think their goal should be to get in the lowest tax bracket possible. While it’s nice to get as many deductions and savings as possible, the focus shouldn’t just be on this year, but on the future as well.

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