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Kevin Molen: Hi there, I'm Kevin Molen with Molen and Associates and I want to teach you about one of the most misunderstood concepts within the tax code. Today, we're going to talk about tax brackets. Which tax bracket you're in is determined by your income. And then we take out your deductions and then we determine your taxable income. So the number that we want to focus on is that taxable income. What I want to do is I want to give you an example to try and help illustrate the concept here. So here what we have is the married filing joint filing status. So that's the one we're going to focus on today. If you're single or head of household, the numbers are going to differ. But if you want, we're happy to give you that information.
Kevin Molen: So for a married filing joint filer, let's operate under just an assumption that you have an adjusted gross income of $104,652 dollars. That's a really specific number, but there's a reason for it, I promise. So we're going to take that adjusted gross income figure and we're going to deduct the standard deduction for married filing joint filer. This assumes that you're under the age of 65 and that number is $24,400. So we deduct that off the top of your adjusted gross income and we arrive at $80,252. Now I'm picking that number on purpose because now what I'm going to show you next is the tax brackets for the year of 2020. OK, so what you're going to see here is the 10% percent tax bracket, which starts at basically the first dollar of taxable income, up to $19,750. That amount of money that you earn is taxed at the 10% percent rate from $19,751 dollars, up to $80,250 is at the 12% percent bracket. Now, remember, your taxable income is $80,252 dollars. You're two of those dollars are taxed into that next higher bracket. Have you ever heard someone say, man, I just made too much money this year, just got to be that next higher bracket and I got hammered, OK? The tax, the income tax doesn't work that way. That's not what happened. That's either a lazy tax adviser or a misunderstanding of the way the tax brackets work.
Kevin Molen: What happens is this income is taxed within these pockets, if you will, these pieces of income. So at $80,252 of taxable income, you have two whole dollars taxed at that higher 22% rate. Probably ninety nine out of one hundred people walking down the street don't understand this and they think that if you make those couple extra bucks, suddenly everything is taxed at that 22% percent bracket.
Kevin Molen: It's called a marginal tax for a reason. So the next time you're worried about making a little bit too much money. Don't sweat it, earn the money. Because if you pay that 10% percent higher rate from 12% to 22% percent on an extra $100, it cost you only $10 more dollars in tax. So earn the extra money because you're worth it. If you're looking for any more fundamental tax tips, you can check out our website at wwww.molentax.com, but if you're really looking for more personalized tax information, please give us a call at 281-440-6279 and speak with one of our tax advisers for a free 15 minute consultation. And if you enjoyed this video, please check out our other videos. teGrGCWpEMQ |